Key Equations and Concepts in the Closed-Economy TEM for EC204

What are the three equations in the closed-economy TEM?

IS curve, Phillips curve (PC), Monetary Response curve (MR)

What does the IS curve represent?

Demand in the economy

What is the dynamic IS equation?

yt = A − a rt−1

What does the Phillips curve represent?

Inflation dynamics from wage-setting and price-setting

What is the Phillips curve equation?

πt = πt−1 + α (yt − ye)

What does the MR curve represent?

Central bank's optimal interest-rate response to inflation

What is the Monetary Response (MR) equation?

(yt − ye) = −aβ (πt − πT)

What does ye represent?

Equilibrium output (output consistent with stable inflation)

What does πT represent?

The central bank's inflation target

Why is the TEM widely used?

It reflects the mainstream New Keynesian framework used in research and policy

Why is the closed-economy TEM important for EC204?

It forms the foundation for the open-economy model studied later

What does the IS curve link together?

Output and the real interest rate

What does the PC curve link together?

Inflation and the output gap

What does the MR curve link together?

Central bank policy and inflation deviations

Why is the TEM considered intuitive?

It provides a simple structure for analysing shocks and policy responses

Why is the TEM useful for policymakers?

It helps them think clearly about how to respond to economic shocks

What TEM curve does a demand shock move?

IS curve

What TEM curve does a supply shock move?

Phillips curve

What TEM curve does an inflation shock move?

Phillips curve