Macroeconomic policies Gang gong Copyright Notes: This electronic file is only used as a lecture notes for the student in this class It is not allowed to be used for presentation anywhere else without the permission from the author
Macroeconomic Policies Gang Gong Copyright Notes:This electronic file is only used as a lecture notes for the student in this class. It is not allowed to be used for presentation anywhere else without the permission from the author
Introduction The objective of this chapter is to move from theory to empiric. Specially, we shall study how macroeconomic policies can be applied to solve practical macroeconomic problems
Introduction • The objective of this chapter is to move from theory to empiric. Specially, we shall study how macroeconomic policies can be applied to solve practical macroeconomic problems
Introduction There are basically two macroeconomic problems on which the macroeconomic policy can have its effect Unemployment Inflation
Introduction • There are basically two macroeconomic problems on which the macroeconomic policy can have its effect. – Unemployment – Inflation
The relation between Inflation and Unemployment From our all market model as established in the last time, we could find a negative relation between inflation and unemployment(please consider how?) Yet. this is only reflected in a theoretical model. how about in empiric?
The Relation between Inflation and Unemployment • From our all market model as established in the last time, we could find a negative relation between inflation and unemployment (please consider how?) • Yet, this is only reflected in a theoretical model, how about in empiric?
The relation between Inflation and Unemployment The Original Phillips Curve: A. W. Phillips 1957) find a significant negative relation between unemployment and the growth rate of nominal wage. In particular. he estimates =+1 where w is the growth rate of wage(note that the estimated B is negative
The Relation between Inflation and Unemployment • The Original Phillips Curve: A. W. Phillips (1957) find a significant negative relation between unemployment and the growth rate of nominal wage. In particular, he estimates where w is the growth rate of wage (note that the estimated is negative. wt = +ut
The relation between Inflation and Unemployment The modern Phillips curve that economists use today differs in three ways from what Phillips examined First, the modern Phillips curve substitutes price inflation for wage inflation. This substitution is reasonable(since price inflation and wage inflation often move together)
The Relation between Inflation and Unemployment • The modern Phillips curve that economists use today differs in three ways from what Phillips examined. – First, the modern Phillips curve substitutes price inflation for wage inflation. This substitution is reasonable (since price inflation and wage inflation often move together)
The relation between Inflation and Unemployment Second. the modern Phillips curve includes expected inflation Third. the modern Phillips curve include the supply shock
The Relation between Inflation and Unemployment – Second, the modern Phillips curve includes expected inflation. – Third, the modern Phillips curve include the supply shock
The relation between Inflation and Unemployment The importance of Phillips Curve Theoretically, it supports Keynesian macroeconomIcs Empirically, it indicates a trade-off between the two most important macroeconomic problems Therefore, solving one problem may cause the other Debates on the Phillips curve(will be presented in the class)
The Relation between Inflation and Unemployment • The importance of Phillips Curve: – Theoretically, it supports Keynesian macroeconomics. – Empirically, it indicates a trade-off between the two most important macroeconomic problems. Therefore, solving one problem may cause the other. • Debates on the Phillips curve (will be presented in the class)
Macroeconomic Policy: Overview The macroeconomic policy can be executed by either government(ministry of finance) or central bank The direct effect of macroeconomic policy is to change aggregate demand. Therefore the policies are often named the demand management policy 22
Macroeconomic Policy: Overview • The macroeconomic policy can be executed by either government (ministry of finance) or central bank • The direct effect of macroeconomic policy is to change aggregate demand. Therefore the policies are often named “the demand management policy
Macroeconomic Policy: Overview Expansionary versus Contractionary A macroeconomic policy that increases the aggregate demand is considered to be an expansionary (fiscal or monetary) policy. It is often applied when the economy is in recession (ow growth and low inflation and high unemployment
Macroeconomic Policy: Overview • Expansionary versus Contractionary: – A macroeconomic policy that increases the aggregate demand is considered to be an expansionary (fiscal or monetary) policy. It is often applied when the economy is in recession (low growth and low inflation and high unemployment)
