This is not an exhaustive list of questions or even topics. You still need to review all material and it would be a good idea to create your own questions to try to answer.
The final exam is comprehensive, so it is highly reccomended to use the material from our previous study guides to study.
Producers will base price increases in part by what they believe the inflation rate will be. They believe their suppliers will increase the price of their inputs, so they have to increase the price of their output similarly. They also think their competitors are likely to increase their prices by a similar amount so they can also do the same without losing business.
In addition, workers may bargain for higher wages today based on what they believe the inflation rate will be over the life of their contract. These wage increases may be passed on in the form of higher prices. Thus inflation expectations may generate actual inflation.
For each of the following, determine whether inflation expectations, demand-pull inflation, or cost-push inflation — and hence inflation overall — will change.
The more positive output gap will likely change demand-pull inflation and is likely to increase inflation.
The tariffs will increase the cost of production for any industry that uses those specific raw materials in their production process. This will change cost-push inflation and inflation will increase.
Identify whether the following will represent a shift in the Phillips curve or a movement along the Phillips curve. Illustrate with a graph.
An unanticipated change in the output gap results in a movement along the Phillips curve since the Phillips curve represents the relationship between the output gap and unexpected inflation.
Inflation changes from last year may be incorporated into expectations of future changes, which are not reflected in the Phillips curve since the Phillips curve only relates unexpected inflation to the output gap.
The late spring freeze leads to a more negative output gap which is a movement along the Phillips curve toward the origin.
To raise output toward the output gap, the Fed could use monetary policy to decrease the risk-free interest rate, which would shift the MP curve down. Alternatively—or as well—an expansionary fiscal policy would boost government purchases so as to increase aggregate expenditure, which would shift the IS curve to the right, and that would also boost equilibrium GDP. It is possible for them to be used together: In 2009 the Fed drastically cut interest rates while the government implemented a substantial stimulus program in the form of the American Recovery and Reinvestment Act in response to the great recession. If either (or both) policies are succesful in eliminating the output gap, unexpected inflation should return to 0%.
Consider the following economy:
IS Function:
\[ Y = 3 \times (600 - 800 \times r) \]
MP Function:
\[ r = 0.03 - 0.02 + 0.04 \]
PC Function:
\[ \pi_t - 0.02 = \frac{(Y - Y^P)}{Y^P} + 0 \]
Inflation expectations are 2%
\[Y = 1680\]
Assume your answer to the previous question is potential output. Now assume a sudden collapse in global trade (perhaps due to geopolitical conflict) has caused exports to fall by $50.
Exports appear in the “autonomous spending” portion of the IS curve. So the $600 in the IS curve becomes $550.
New equilibrium is \(1530\), the output gap is \(-9/%\), unexpected inflation is \(-9/%\), and total inflation is \(-7/%\).
The IS curve will shift to the left, the output gap will fall, and we move down the PC curve.
The Fed will have to decrease its policy rate by \(-6.25/%\). This is clearly a problem because the current policy rate is \(3%\) and nominal policy rates cannot be negative. This is the zero lower bound problem we have encountered before.
We have described durable goods, residential investment and net exports (via the exchange rate) as being affected by interest rates and credit conditions.