Revision Lecture 2

NO question on unemployment/curve, beveridge curve. Dont need

to know how unemployment is measured
Inflation need to know equation and how its measured. However
NOT many mathematical questions on inflation. Maybe a bit of case
studies
NEED TO KNOW QM THEORY Slide 78 onwards on Topic 3. NEED TO
KNOW OKUNS LAW AND PHILLIPS CURVE
What the QM theory states direct proportion between changes in
supply of money and inflation. Remember the GROWTH equation for
money
Is it true that growth of money causes inflation? FALSE, as it has
been proven that it is not always the case. Its true in some
circumstances e.g. Zimbabwe, but QE in 2009 proved that money
supply can grow without inflation. Also in Germany, inflation was
growing at a HIGHER rate than the supply of money. Relation DOES
NOT always hold
Just know 4 slides in revision slides for QM theory. What equation
says and whether it holds
GDP per capita, growth is NOT coming up. Output gap however is
MORE IMPORTANT than growth Slide 94-108 is not necessary
How output gap measures, definition, what it shows and conflict of
objectives Philips curve
Okuns Law specific growth rate where change in unemployment is
zero
When line is steeper, country is more sensitive to changes in
unemployment by the economic situation. Japan firms offer so
much security so that unemployment does not increase that much,
e.g. not going to hire many people during boom/fire during bust.
Dont need to know how Okuns law growth model is constructed
Okuns law measures the deviation between the average
unemployment and actual unemployment
Whenever we are on natural rate of unemployment, we should
observe output gap to equal zero
Difference in actual/natural rate of unemployment is due to
CYCLICAL reasons e.g. business cycle, recession etc
Every time you observe a ve output gap, unemployment rate
should be above equilibrium
Two equations (growth and gap), what they mean prob going to be
essay
PHILIPS CURVE IS COMING IN EXAM
From 1905 to 1955 inflation fluctuated between high and low
periods, people didnt worry as average was about zero. Between
60-65, people expected, positive inflation was not compensated by
negative inflation, hence they thought something in the economy
had changed. People then expected inflation to be positive.

People base wages on expected inflation in the future. When

bargaining for contract, people can use expectations as a basis for
higher wages. To ensure equilibrium, the offered wage must be
equal to expected wage.
Questions why did the Philips curve remiang stable for so long?
Originally, no shocks = no expectations. Then inflation changed. -)
Expectations, natural rate of employment, shocks (second
equation). Then expectations became adaptive people set
expectation of inflation as proportion of last years. Then people said
whenever UE is at stable rate, expected inflation = actual inflation.
(PC Natural Rate). Then people factored shocks (PC Shocks
equation). Can jump straight from first to last equation.