Term 2 Lecture 10 - Business Cycles - Inflation Puzzles

What are the two types of shocks according to the Keynesian model?

Demand shocks and supply shocks.

What is the immediate effect of negative demand shocks on inflation?

They tend to decrease inflation.

What is the immediate effect of negative supply shocks on inflation?

They tend to increase inflation.

What complicates the isolation of demand and supply shocks in practice?

Demand and supply shocks are likely to happen simultaneously.

What significant event marked the beginning of the Great Depression?

The stock market crash in October 1929.

What was the inflation dynamic during World War I?

Large inflation.

What was the inflation dynamic during the Great Depression?

Large deflation.

What was the inflation dynamic during World War II?

Large inflation.

What economic phenomenon occurred during the Korean War?

Large inflation.

What was the inflation dynamic during the Great Moderation (1983-2008)?

Low stable inflation.

What caused the inflation during the 1970s Oil Price Shocks?

A reduction in the supply of oil by OPEC, leading to increased production costs.

What is stagflation?

A combination of high inflation and recession.

What was a significant cause of the Great Recession?

Financial innovation in the mortgage markets.

What role did agency problems play in the mortgage markets during the Great Recession?

Mortgage brokers often did not evaluate borrowers' ability to repay loans.

What issue arose with credit-rating agencies during the Great Recession?

Conflicts of interest led to inflated ratings of risky financial products.

What was the inflation dynamic following the financial crisis of 2008-2009?

Small deflation.

What has been the inflation dynamic post-COVID-19 pandemic?

Large inflation.

What does the behavior of inflation during business cycles help to infer?

The type of shocks that generated a recession.

What was the inflation dynamic during the post-World War II period (1944-1949)?

Large inflation.

What was the inflation dynamic during the Oil Price Shock of 1977-1983?

Large inflation.

What is the research question posed regarding inflation over business cycles?

Can we explain the different price level dynamics observed in the data?

What financial event led to a sharp decline in mortgage values and financial assets?

The Great Recession

What was the primary economic impact of the Great Recession on aggregate demand?

A large drop in aggregate demand

What is the 'missing deflation puzzle'?

The observation that inflation did not significantly decrease during the Great Recession despite a large demand shock.

What does the backward-looking Phillips Curve measure?

Inflation expectations based on an average of past inflation rates.

What are the two main explanations for the missing deflation puzzle?

1. A shift in the AS Curve; 2. A change in the slope of the AS Curve.

What could cause a shift in the AS Curve during the Great Recession?

Increased oil prices, wage rigidity, and changes in inflation expectations.

How do higher menu costs affect the AS Curve?

They increase the costs of changing prices, making prices less responsive to demand.

What role does increased market power play in inflation dynamics?

It makes prices less responsive to overall demand conditions.

What is one significant factor that Coibion and Gorodnichenko (2015) identified as influencing inflation expectations?

An increase in inflation expectations during the crisis.

How do consumers' inflation expectations react to changes in oil prices?

Consumers adjust their inflation expectations more when oil prices change due to the visibility of gasoline prices.

What is the relationship between unemployment and inflation during the financial crisis recovery?

Despite low unemployment, inflation remained low and steady, leading to the missing inflation puzzle.

What does the AS-AD model explain about inflation dynamics?

It can explain inflation dynamics, including scenarios where inflation does not behave as expected during recessions.

What does a shift in the AS curve imply for inflation and output gap?

It generates a lower fall in inflation but a larger output gap.

What was the conclusion regarding cyclicality in inflation during recessions?

Inflation can rise or fall during recessions depending on supply or demand shocks.

What is the significance of the Phillips Curve in understanding inflation?

It illustrates the relationship between unemployment and inflation, which has weakened over time.

What did Jerome Powell suggest about the relationship between unemployment and inflation?

He explained that the relationship has weakened as the Fed gained control of inflation.

What is one of the main ingredients in the model explaining the missing deflation puzzle?

Changes in inflation expectations.

What does the term 'AS Curve' refer to?

Aggregate Supply Curve, which represents the total supply of goods and services in an economy.

What is the impact of globalization on inflation dynamics?

It may have made inflation less responsive to national demand conditions.

What is the role of wage rigidity in the context of the Great Recession?

It prevents firms from fully adjusting their prices in response to lower demand.

What did the University of Michigan Survey of Consumers measure?

Consumers' inflation expectations regarding price changes over the following 12 months.

What is the implication of a flatter AS curve?

It results in less sensitivity of prices to demand conditions.

What happens to inflation expectations when consumers frequently purchase gasoline?

They tend to adjust their inflation expectations more when oil prices change.

What is the significance of the 'missing inflation puzzle'?

It highlights the unexpected stability of inflation despite declining unemployment.

What are the two types of shocks that can affect inflation during recessions?

Negative supply shocks and negative demand shocks.

What does the term 'output gap' refer to?

The difference between actual output and potential output in an economy.

What is the effect of increased production costs on inflation?

It can contribute to higher inflation rates.