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CH 13
CH 13
MACROECONOMICS
TENTH EDITION
PART III The Core of Macroeconomic Theory
Demand-Pull Inflation
Cost-Push, or Supply-Side, Inflation
Expectations and Inflation
Money and Inflation
Sustained Inflation as a Purely Monetary Phenomenon
The Behavior of the Fed
Targeting the Interest Rate
The Fed’s Response to the State of the Economy
Fed Behavior Since 1970
Interest Rates Near Zero
Inflation Targeting
Looking Ahead
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The Aggregate Supply Curve
The aggregate supply curve is not a market supply curve, and it is not
the simple sum of all the individual supply curves in the economy.
Aggregate Supply
in the Short Run
At some level the overall economy is using all its capital and
all the labor that wants to work at the market wage. At this
level (Y*), the AS curve is vertical.
Potential GDP
FIGURE 13.6 A Shift of the Aggregate Demand Curve When the Economy Is Operating At or Near
Maximum Capacity
If a shift of aggregate demand occurs while the economy is operating near full capacity, the
result will be an increase in the price level with little increase in output from point B to point
B.
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Monetary and Fiscal Policy Effects
The longer the lag time between wages and output prices, the greater
the potential impact of monetary and fiscal policy on aggregate output.
Some argue that wages do not fall during slack periods and that the
PART III The Core of Macroeconomic Theory
Demand-Pull Inflation
stagflation Occurs when output is falling at the same time that prices are rising.
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Causes of Inflation
It is also interesting to
note that many people
believed the official
statistics on inflation
understated their own experience.
Virtually all economists agree that an increase in the price level can be
caused by anything that causes the AD curve to shift to the right or the
AS curve to shift to the left.
monetary phenomenon.
The actual variable of interest to the Fed is not the money supply, but
the interest rate.
Targeting the interest rate thus gives the Fed more control over the
key variable that matters to the economy.
PART III The Core of Macroeconomic Theory
Fed Behavior
Since 1970
The Fed lowered the short-term interest rate to near zero beginning in
2008 IV.
Since interest rates cannot go below zero, the ability of the Fed to
stimulate the economy when interest rates are zero is severely limited.
This option is not available when interest rates are near zero. In this
case, stimulus must come primarily from fiscal policy.
Inflation Targeting
Looking Ahead
We have still said little about employment, unemployment, and the functioning
of the labor market in the macroeconomy.
The next chapter will link everything we have done so far to this third major
market arena—the labor market—and to the problem of unemployment.
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REVIEW TERMS AND CONCEPTS
aggregate supply
demand-pull inflation
inflation targeting
stagflation