ECON 341 Short-Run Model Key Variables and Curves Overview

Short-run output

I_t = (Y_t - I_t) / I_t

Okun's Law

I_t = -2 (u_t - u^n)

Steady state

I = 0, π = π*.

IS Curve Equation

I_t = a_t - b(R_t - r*)

IS Curve

Downward sloping.

IS Curve Shifts

From demand shocks (C, I, G, NX).

Movement along IS

From interest-rate changes.

Fisher Equation

R = i - π

Sticky inflation

Fed moves real rates by adjusting nominal rates.

Phillips Curve

π_t = π_{t-1} + vI_t + o_t

Phillips Curve Implications

I > 0 ⇒ rising inflation (expansionary gap).

o_t

Price shocks (oil, supply disruption).

Monetary Policy Rule (Taylor)

Two forms: R - r = m(π - π) and R = r + m(π - π).

Higher m

More aggressive Fed response.

AD Curve

Derived from IS + MP rule.

AD Curve Shifts

With a_t changes, foreign shocks, taxes, G, or π*.

Slope of AD Curve

Depends on aggressiveness m.

AS Curve

Upward sloping.

AS Curve Shifts

From lagged inflation or cost-push shocks.

Negative AD shock

AD left → I < 0, π falls → AS down over time (self-corrects).

Supply shock (oil shock)

AS up/left → I < 0 and π ↑ (stagflation) → policy tradeoff.

Quick Checklist

Output/unemployment → Okun, Inflation changes → Phillips sign of I, Real rate → Fisher, Policy rate → Taylor, AD shifts: C, I, G, NX, π*, AS shifts: π_{t-1}, o_t.