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• Historical reference to Paul Volcker, who adopted contractionary policies in the 1980s to curb inflation.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.