MIT 14 02 - Mundell-Fleming (21 pages)

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Mundell-Fleming



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Mundell-Fleming

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Lecture Notes


Pages:
21
School:
Massachusetts Institute of Technology
Course:
14 02 - Principles of Macroeconomics
Principles of Macroeconomics Documents

Unformatted text preview:

Lecture 16 Review Mundell Fleming AD AS Mundell Fleming IS Y C Y T I Y i G NX Y Y E e 1 i i Interest parity i LM IS Y E e E 1 i i Fiscal and Monetary policy E Fixed Exchange Rates Credible A little bit of it even in flexible exchange rates systems commitment to E rather than M i i M YL i P Central Bank gives up monetary policy Interest parity i LM i IS Y Fiscal and Monetary policy Capital controls imperfect capital flows E Exchange Rate Crises i LM i IS Y E Note There is a shift in the IS as well but this is small especially in the short run Building the Aggregate Supply The labor market Simple markup pricing Long run Natural rate Aggregate demand factors don t matter for Y Short run Impact Same as before but P also change partial Dynamics go toward Natural rate Wage Determination Bargaining and efficiency wages e W P F u z Real wages Nominal wage setting Bargaining power Fear of unemployment Unemployment insurance Hiring rate reallocation Bargaining Price Determination Production function simple Y N P 1 W The Natural Rate of Unemployment Long Run P Pe The wage and price setting relationships W F u z P P 1 W The natural rate of unemployment F u z 1 1 W P 1 1 Price setting Wage setting u z markup n Unemployment From un to Yn u U L N 1 N 1 Y L L L L F 1 Y L z n 1 1 W P Wage setting 1 1 Price setting Y n z markup Y Aggregate Supply e W P F 1 Y L z P 1 W P P e 1 F 1 Y L z P Pe 1 F 1 Y L z AS P P e Y n Y Aggregate Demand IS LM Y C Y T I Y i G M Y L i P LM P P i LM Y AD Y Y M P G T P AD Y AD AS Canonical Shocks AS P AD Yn Monetary expansion fiscal expansion oil shock Y From AS to the Phillips Curve The price level P t vs e P t 1 The inflation rate F u t z Note that P t P t 1 1 P t P t 1 P t 1 e e P t P t 1 1 P t P t 1 P t 1 Let t P t P t 1 P t 1 Then e 1 1 t 1 t but ln 1 x x F u t z if x is small Let also assume that ln F u t z z u t The Phillips Curve The price level P t vs e P t 1 The inflation rate F u t z t e t z u t The Phillips Curve and The Natural Rate of



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