1. Inflation, unem
ployment, Busin
ess Cycle
Microeconomic Foundation
Alaleh Mani
2011

2. Quick Review
Inflation:
Inflation, Price level, GDP deflator
AD:AD Speed up Potential GDP, Quantity of money
ASA: Oil Price
Expectation: E(Inflation) push AD right LAS0
LAS0
1.Technology
Economic Growth: 2.Capital
Accumulation
3. Labor Growth
Real GDP

3. Inflation
 Three different monetary phenomenon cause inflation:
1.Demand Pull Inflation:
1. Interest rate Fall  Investment Rise( CFA EXAM 2009)
2. Tax Fall Consumption and Investment Rise
3. Quantity of Money rise  interest rate fall  investment rise
4. Export rise
5. Import Fall
2.Cost push Inflation:
1. 1.Money wage rate increase
2. 2.Natural resource price rise
3.Expectation of Inflation
It is a theory of quantity of Money: Consumption will rise due to
expectation  AD rise
Cost of Factor of production rise

4. Demand Pull Inflation
1. Interest rate Fall  Investment Rise( CFA EXAM 2009)
2. Tax Fall Consumption and Investment Rise
3. Quantity of Money rise(Fed Buy back bond) (exam 2009) interest
rate fall  investment rise
4. Export rise
5. Import Fall
Unemployment<Natural
One time rise in the price level does not mean inflation

5. Demand Pull rise process

6. Cost Push Inflation
1. Money wage rate increase
2. Natural resource price rise
Fed cuts Tax to calm down the outr
And fight against STAGFLATION
Unemployment>Natural
One time rise in the price level does not mean inflation

7. Cost Push Rise process

8. Expected Inflation
 In expect of rise of AD, money wage rise at same pace
 If expectation is based on relevant information it is rational
expectation

9. Phillips Curve
 To simplify the AS AD movement
 To depict short run inflation
 To see actual inflation and E(inflation)
 The relation between unemployment and
inflation
 AS talks about price level(inflation) and
GDP(labor force production)Phillips curve
derive from AS
 E(inflation rate) and natural
unemployment=constant

10. SRPC
Unemployment > natural unemployment rate

11. Expectation change LRPC

12. PC movement
Increase in natural UNEMPLOYMENT: labor population
The whole system moves
Expectation =fix
natural unemployment 1
natural unemployment 2

13. Business Cycle
Inflation, Price level, GDP deflator
LAS0
LAS0
Mainstream Business cycle theory
Different speed cause fluctuation
in AD
lead to Business Cycle
A
Economic Growth and EXPANSION: D
AD
AD
Real GDP

14. Business Cycle
 Keynesian: AD moved by Investor confidence
 Monetarist: AD moved by Quantity of money
 New classical: AD moved by expectation of
inflation
 New Keynesian: Consider money wage rate on
SAS movement as well
 Real Business Cycle:
R&D  Pulse in new technology  Productivity after
a lag LAS grows
Lag caused by low skilled worker that need time to
adapt with technology this lag make a reverse
movement of AD and AS at fist and cause cycles