Test 3 Macro Study Guide PDF

Test 3 Macro Study - **Expected Inflation** - Higher than expected benefits borrowers - Lower than expected benefits lenders - **Fed Fights Inflation** - Early 1980's fed starts fighting inflation, ex: 1983 = 3% - Easier to not establish high inflation expectation,...

Test 3 Macro Study - **Expected Inflation** - Higher than expected benefits borrowers - Lower than expected benefits lenders - **Fed Fights Inflation** - Early 1980's fed starts fighting inflation, ex: 1983 = 3% - Easier to not establish high inflation expectation, better to write them out once established - **Hyper Inflation** is 50% for 6 months or more - Ex: Germany 1920s Yugoslavia 1990s and Zimbabwe 2000s - Germany paid workers twice a day - **Real vs Nominal Wage** - People don\'t tend to think about real vs. Nominal wage - Sometimes a little inflation helps lower unemployment - Tricks companies into thinking labor is cheaper, therefore acquiring more of it - Doesn\'t work on sophisticated parts of labor or for long periods of time - **Money Demand** - Nominal money supply is the amount of money in a certain aggregate - But real M1 would be nominal/price level - During inflation, Nominal money balances rise, but real fall - **Money Demand Cont.** - 2 Main factors - Expected Inflation - Real Interest Rate - Inflation reduces real value of money, you want to hold less - Real interest rate is the cost of holding - Real quantity of money demanded decreases as a function of expected + real - If expected inflation is low we can ignore it and put RIR on the Y axis - ISLM building block - **Unemployment** - Costs - Financial hardships - Stress - Lost output - Rises in recession falls in expansion - Duration of unemployment from January 12 -- December 22 - \