Macromodelling

The expections-augmented Phillips curve Part ii 1. P = Pe + g (y ? y*) 2. R = a1 . y ? a2 . (m ? p) 3. r = R - Pe 4. y = b0 ? b1 . r 5. p = Lp + P Equation 1 is derived directly from the veg marrow of the expectations-augmented Phillips curve. It states that existing pomposity is equal to expected inflation when the unemployment lay is at the inseparable level. In other words, the unemployment enume entry differs from the natural rate when expected inflation does not relate actual inflation. Unemployment is then substituted with output, y, and we end at equation 1. (See win story below). The parameter g de bourneines how much a diversion between output and potential output affects the inflation rate. In the model, y is the put down of gross domestic product. This makes sense, because we are normally interested in dower increases in GDP. Using the pound get means that a steady growth gives a linear role, whereas without the log form we would have to use an expo nential functional form. Equation 2, where R is the nominal interest rate, m is the log of the money line of descent and p is the log of the price level, states that the nominal interest rate is a function of GDP and the growth of the money depot and the price level.

The commencement part of the equation (a1.y) means that when GDP increases this tends to push up R by the factor a1. The term (m - p) is the var. of real name money balances. If prices are growing at a high rate than the money striving, the stock of real money balances leave alone decrease, and thus the nominal interest rate will increase. Equal ly, when the stock of money is growing faste! r than prices, the stock of real money... If you requirement to get a full essay, club it on our website: BestEssayCheap.com

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