A TwoPart Lecture

1
A Two-Part Lecture
ECO 105 Lecture 4.2 18 April 2007
2
I. Costs of Inflation
Who are these guys? And why are they on this
slide?
3
Costs of Inflation

• Check the web site for a reading on this topic.
• We might entertain the hypothesis that, when
  everybody complains of being worse off in the
  face of reportedly unchanged real G.N.P., they
  may be right. -- Axel Leijonhufvud

4
Inflation distorts the price system.

• Its like
• It leads to
• It leads to

5
Transaction costs increase.

• Shoeleather costs - engaging in more
• Menu costs - changing prices

6
Income and wealth are redistributed arbitrarily.

• Asset holders lose,
• Taxpayers are
• Government services
• Productivity may suffer whats a merit raise
  really worth
• Everyone has the feeling that the process is

7
Calls for government involvement increase.

• Do something!
• Rejecting equality of opportunity (the rule of
  law) in favor of
• Private contracts give way to
• Regulation increases,

8
II. Economic Fluctuations
9
The Economy Has Its Ups and Downs

• Most economies grow, but they
• Expansions are disrupted by

10
Real GDP in 1996 Dollars
11
Investment Is Relatively Unstable
12
Growth Rates Look More Unstable
13
Some Macroeconomic Facts

• Economic fluctuations are
• Most macroeconomic variables
• As output falls,

14
Unemployment fell during the long expansion of
the 1990s
15
Explaining Economic Fluctuations

• Well develop and make use of an __________
  demand-aggregate __________ model.
• AD is based on _____ ______________ categories.
• AS is based on the _____________ ___ firms and
  government.

16
Aggregate Demand

• Y C I G NX
• Y is ______ _____, so the components of aggregate
  demand are in _______ terms.
• I.e., measured in _____-_____ prices.

17
The Aggregate Demand Curve
Price Level
AD looks like an ordinary demand curve but
looks can be deceiving.
AD
Y
18
AD Curve (1)

• Whats in the ceteris paribus clause?
• Whats ______ ______________?
• Desire to save ( of income)
• ___________ demand curve I F(r, Ye)
• Government ______________ (G)
• _____ rates
• __________ supply

19
AD Curve (2)

• Yd falls as PI rises but not because of the
  _________________ effect.
• The __________ effect real asset values
• The _______-_____ effect cost of borrowing
• The exchange-rate effect foreign __________
• All combine to produce a ____________ sloped ___
  curve.