Chapter 12: Monetary Policy and the Phillips Curve - Vocabulary Flashcards

Vocabulary flashcards covering key concepts, equations, and terms from the lecture notes on monetary policy, the Phillips Curve, and related macroeconomic frameworks.

Monetary policy

Actions by the central bank to control the money supply and credit conditions to achieve macro goals (e.g., price stability and economic growth).

Central bank

The institution responsible for a country’s monetary policy, including setting policy instruments like the nominal interest rate.

Nominal interest rate (i)

The interest rate stated in money terms, including expected inflation.

Real interest rate (r)

The interest rate adjusted for inflation, reflecting the purchasing power of money.

Expected inflation (π^e)

The rate of inflation that households and firms expect to occur in the future.

Fisher Equation

i = r + π^e; the nominal rate equals the sum of the real rate and expected inflation.

Phillips Curve

A graphical/conceptual representation of the trade-off between unemployment and inflation; traditionally negative in the short run, but context matters.

Unemployment

The share of the labor force that is without work but seeking work; central to the Phillips Curve discussion.

Inflation

The rate at which the general price level for goods and services is rising.

Inflation targeting / price stability

Central banks aim for a stable, predictable inflation rate to maintain price stability.

Policy credibility

Market belief that the central bank will follow through on its policy commitments, shaping expectations.

Transmission mechanism

The process by which policy actions (like rate changes) affect investment, consumption, and output.

Expansionary monetary policy

Policy stance that lowers nominal rates and/or increases money supply to stimulate demand.

Contractionary monetary policy

Policy stance that raises rates and/or reduces money supply to dampen demand.

Money supply

The total amount of money available in the economy, controllable by the central bank.

Money demand curve

Relationship between the quantity of money people want to hold and the nominal interest rate.

IS curve

A curve showing the is-equilibrium in the goods market: combinations of output and interest rate where spending equals output.

MP curve (Monetary Policy Curve)

The central bank’s policy response curve, showing how the policy rate relates to inflation/output to stabilize the economy.

Output gap

The difference between actual output and potential output; positive gaps put upward pressure on inflation.

Great Inflation

A period in the late 1960s–1970s with high and persistent inflation in many advanced economies.

Oil price shocks

Sudden large changes in oil prices that raise production costs and inflation.

Wage-price spiral

A self-reinforcing cycle where higher wages raise costs and prices, which then lead to higher wages.

Supply shocks

Unanticipated changes in the availability or cost of inputs that affect prices.

Stagflation

A condition of rising inflation and high unemployment occurring together.

Quantity Theory of Money

MV = PY; the money supply times velocity equals price level times real output.

MV = PY

The Quantity Theory of Money equation; relates money, velocity, price level, and output.

Velocity of money (V)

The average frequency with which money changes hands in a period.

Price level (P)

The average level of prices for goods and services in the economy.

Real output (Y)

Inflation-adjusted measure of a country’s production (real GDP).

Adaptive expectations

Expectations formed based on past inflation, e.g., π^e ≈ π_{t-1}.

Actual inflation (π_t)

The observed rate of inflation at time t.

Price gouging

In the notes, a term describing price increases driven by demand and expectations (not a standard economic term).

Change in inflation equation (Δπt = v̅ Ŷ̃t + ō)

The change in inflation equals the impact of the output gap (v̅ Ŷ̃_t) plus an exogenous factor ō.

IS-MP framework

A macro model combining the IS curve and the MP curve to analyze output and inflation dynamics.

Endogenous interest rate

An interest rate that is determined within the model by money demand and supply, not set directly by policy.

Vertical money supply

A presentation where money supply is fixed, so the interest rate is determined endogenously by money demand.

Long-run equilibrium

The sustainable level of output with stable inflation where resources are fully utilized.