1 / 30

Interest rate ( r )

B. A. Fed Reaction Rule. If the Fed sees the inflation rate rising…. Inflation rate ( π ). π 1. π 0. …it moves to raise interest rates. r 0. r 1. Interest rate ( r ). A. B. 45. AD 0 (with old interest rate, r 0 ). E 0. AD 1 (with new, higher interest rate, r 1 ).

romney
Download Presentation

Interest rate ( r )

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. B A Fed Reaction Rule If the Fed sees the inflation rate rising… Inflation rate (π) π1 π0 …it moves to raise interest rates r0 r1 Interest rate (r )

  2. A B 45 AD0 (with old interest rate, r0) E0 AD1 (with new, higher interest rate, r1) Aggregate Demand and Output E1 Y1 Y0 Income

  3. Fed sees inflation rising Raises interest rates Investment is discouraged Aggregate demand falls Equilibrium GDP falls

  4. B …the Fed takes action to “cool off” the economy Inflation rate (π) π1 If inflation rises… A π0 Aggregate Demand Equilibrium (ADE) Y1 Y0 Output (Y )

  5. Fed sees inflation falling Lowers interest rates Investment is encouraged Aggregate demand rises Equilibrium GDP rises

  6. Inflation rate (π) ADE1 ADE0 Output (Y )

  7. 10% target Inflation rate (π) 5% target ADE0 ADE1 Output (Y )

  8. Wage-Price Spiral Recession Aggregate Supply Response (ASR) Inflation rate (π) Maximum Capacity Output (Y ) Y*

  9. Inflation rate (π) ASR1 ASR0 Output (Y )

  10. Inflation rate (π) ASR0 ASR1 Expansion of Maximum Capacity Output (Y )

  11. Recession ASR Inflation rate (π) E0 ADE Output (Y ) Y*

  12. Inflation (percent per year) 1965 1964 1963 Unemployment Rate (percent)

  13. Recession ASR Inflation rate (π) E1 ADE1 E0 ADE0 Output (Y ) Y*

  14. 1969 1968 1967 Inflation (percent per year) 1966 1965 1964 1963 Unemployment Rate (percent)

  15. Wage-Price Spiral ASR Inflation rate (π) E1 E0 ADE1 ADE0 Output (Y ) Y*

  16. 1973 1970 1971 1969 1968 1972 1967 Inflation (percent per year) 1966 1965 1964 1963 Unemployment Rate (percent)

  17. ASR1 E1 Inflation rate (π) E0 ASR0 ADE0 ADE1 Output (Y ) Y*

  18. 1975 1974 1976 1973 Inflation (percent per year) 1969 1970 1963 Unemployment Rate (percent)

  19. Inflation rate (π) ASR1 E1 ASR0 E0 ADE Output (Y ) Lower Capacity

  20. Inflation rate (π) E0 ASR0 E1 ASR1 ADE Output (Y )

  21. 1981 1975 Inflation (percent per year) 1969 1970 1983 1963 Unemployment Rate (percent)

  22. Recession ASR Inflation rate (π) E1 E0 ADE0 ADE1 Output (Y ) Y*

  23. Recession Inflation rate (π) ASR0 E0 ASR1 E1 ADE0 ADE1 Output (Y ) Y*

  24. 1984 Inflation (Percent Per Year) 1989 2007 2000 1992 1998 Unemployment Rate (Percent)

  25. 1992 Inflation (percent per year) 1994 1999 1997 1998 Unemployment Rate (percent)

  26. Inflation rate (π) E0 ASR0 E1 ASR1 E2 ASR2 ADE Higher Capacity Output (Y )

  27. Classical ASR Inflation rate (π) ADE Output (Y ) Y*

  28. GDP Peak Peak A A Y* B Trough Year

  29. ASR Inflation rate (π) A B ADE ADE Output (Y ) Y*

  30. Classical ASR E1 Inflation rate (π) ASR1 E0 ADE1 ADE0 ASR0 Y* Output (Y )

More Related