Einführung in die Makroökonomie

Vorlesung 3

Universität Bern
Frühjahrssemester 2023
Carlos Lenz

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BFS, 6. März 2022

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 LIK-Beiträge und Gewichte

Komponente Gewicht in %
Inländische Waren und Dienstleistungen ohne Mieten 56.9
Mieten 18.6
Ausländische Waren und Dienstleistungen ohne Erdölprodukte 21.6
Erdölprodukte 2.9 Quelle: BFS

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 8.1 Introduction
• In this chapter, we learn:
– What inflation is, and how costly it can be.
– How the quantity theory of money and the
classical dichotomy help us understand
inflation.

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• Inflation
– The percentage change in an economy’s overall
price level
• Deflation
– Negative inflation
• Disinflation
– An episode with declining inflation rates
• Hyperinflation
– an episode of extremely high inflation
– Greater than 500 percent per year
– Example: Germany in the 1920s

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 • The inflation rate is computed as the
annual percentage change in the price
level
Price level in year t

𝑃𝑃𝑡𝑡 − 𝑃𝑃𝑡𝑡−1 𝑃𝑃𝑡𝑡

𝜋𝜋𝑡𝑡 = = −1
𝑃𝑃𝑡𝑡−1 𝑃𝑃𝑡𝑡−1
Inflation rate in year t

• The Consumer Price Index (CPI)

– Price index for a bundle of consumer goods
– An important measure of the price level

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 8.2 The Quantity Theory of Money

• Money: Banknotes or Bank Accounts

• Historically
– Money was backed by gold or silver
• Today
– Currency is “fiat money.”
– Currency is paper that the government
simply declares is worth a certain price.
– Money has value because we expect others
will value it.
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 The Quantity Equation

• The quantity theory of money allows us

to make the connection between money
and inflation.

Money Velocity Price Real

supply of money level GDP

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The Classical Dichotomy, constant
Velocity, and the Central Bank

• The classical dichotomy

– States that, in the long run, the real and
nominal sides of the economy are
completely separate.

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 The Quantity Theory for the
Price Level

• To solve the model

– Assume 𝑀𝑀𝑡𝑡 , 𝑉𝑉𝑡𝑡 , and 𝑌𝑌𝑡𝑡 to be exogenous
– Plug all the exogenous variables
– Solve for the price level

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 The Quantity Theory for Inflation
• We can express the quantity equation in
terms of growth rates.

• Using g as growth rate:

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 =0 =π
(V is assumed constant) (rate of inflation)

• Thus:

Rate of Growth rate in Growth rate

inflation money supply in GDP

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• The neutrality of money says that
changes in the money supply
– Have no real effects on the economy
– Only affect prices
• Empirically
– Holds in the long run
– Does not hold in the short run
• nominal prices do not respond
immediately to changes in the money
supply

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8.3 Real and Nominal Interest
Rates
• The real interest rate
– Is equal to the marginal product of capital
(= MPK)
– Is paid in goods
• The nominal interest rate
– Is the interest rate on a savings account
– Is paid in dollars

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• The Fisher equation

Nominal Real Rate of

interest interest inflation
rate rate

• The nominal interest rate is generally

high when inflation is high.

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 𝑖𝑖 = 𝑅𝑅 + 𝜋𝜋
⇒ 𝑅𝑅 = 𝑖𝑖 − 𝜋𝜋
• Empirically
– The real interest rate has repeatedly been
negative
– This implies that in the short run the real
interest rate need not equal the MPK.
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 8.4 Costs of Inflation
• Who is hurt during inflation?
– Individuals having a pension that is not
indexed to inflation
– Banks issuing loans at fixed rates but pays
interest rates that move with the market
– Individuals with a variable rate mortgage

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• Large surprise inflations can lead to
large distributions in wealth.
– People with debts can pay back loans with
new cheaper dollars.
– Creditors wind up losers.
• Inflation also distorts relative prices.
– Some prices adjust faster to inflation than
others
• Menu costs
– Costs to firms of changing prices frequently.
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 9.1 Introduction

• In this chapter, we learn:

– How the gap between actual GDP and
potential GDP is a key measure of the
economy's performance in the short run.
– How costly fluctuations in economic activity
can be.
– The relationship between output and
unemployment.

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 9.2 The Long Run, the Short
Run, and Shocks

• Potential output
– The amount the economy would produce if all
inputs were utilized at their long-run
sustainable levels

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 Trends and Fluctuations

• Short-run fluctuation
– The difference in actual and potential output
• Output gap (also: short-run output or detrended output)
– The difference in actual and potential output,
expressed as a percentage of potential output

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Produktionslücke in Prozent, Schweiz
( = output gap = short-run output)

𝑌𝑌�𝑡𝑡
Boom

Rezession

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9.4 Okun’s Law: Output and Unemployment

• Natural rate of unemployment:

– The rate of unemployment that prevails in
the long run
• Cyclical unemployment
– The difference between current
unemployment and the natural rate of
unemployment

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 Okun’s Law
Cyclical
unemployment

Current rate of
unemployment

Natural rate of Short-run

unemployment output

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Okun's Law:U.S. Economy, 1960-2018

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