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4/22 - Macro final lecture (ch 27 pres)

Class Structure

  • The class session was affected by technical issues; only the second recording was recorded correctly.
  • The presentation today is short (9 slides), covering the last chapter of the course.
  • A review session is scheduled for Thursday before the exam on May 6.

Chapter Overview

  • Topic: Inflation, Unemployment, and Federal Reserve Policy.
  • Conceptual framework similar to previously covered material. No assignments assigned for this presentation.

Key Concepts and Graphs

  • Aggregate Demand and Unemployment:
    • When aggregate demand increases (curve shifts right), unemployment falls and inflation rises.
    • Inverse relationship: Higher inflation rates correlate with lower unemployment.
  • Negative Demand Shift:
    • When aggregate demand decreases (curve shifts left), inflation falls and unemployment rises.
    • Again, an inverse relationship is observed.

Stagflation

  • Definition:
    • Occurs when both inflation and unemployment rise.
  • Complex economic scenario needing careful management from the Federal Reserve.

Phillips Curve

  • Named after A.W. Phillips, graphically represents the relationship between inflation and unemployment rates.
  • Short Run Phillips Curve: Downward sloping, showing inverse relationship.
  • Long Run Phillips Curve: Vertical, represents the natural rate of unemployment (about 5% for most economists).
  • Movement along the curve indicates changes in actual inflation versus expected inflation.

Key Formulas and Real Wage Calculation

  • Real Wage Formula:
    • Real Wage = (Nominal Wage / Price Level) × 100
    • Example: A $30/hour wage at a price level of 105 results in a real wage of approximately $28.57.
  • Effect of Inflation on Real Wage:
    • If actual inflation exceeds expectations, real wages decline, making labor cheaper for employers.

Economic Implications

  • Response to Unexpected Inflation:
    • If inflation is higher than expected, cost of labor decreases, leading employers to hire more workers.
    • Conversely, if inflation is lower than expected, real costs increase, leading to potential layoffs.

Federal Reserve Policy

  • During stagflation, the Fed might prioritize controlling inflation over reducing unemployment.
  • Historical reference to Paul Volcker, who adopted contractionary policies in the 1980s to curb inflation.

Review Summary

  • Key concepts to focus on during the review:
    • Inverse relationships between inflation and unemployment.
    • Understanding of the Phillips curve dynamics and its implications for monetary policy.
    • Familiarity with real wage calculations and their significance in economic terms.
    • Possible exam questions may cover the response of the Fed during different economic scenarios, particularly stagflation.