Lectures in Macroeconomics- Charles W. Upton Updating the Model.

Lectures in Macroeconomics- Charles W. Upton

Updating the Model

Y

M

Pe

P

Yf

P PP up; r (?); Y up

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The Raw Phillips Curve

U0

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The Correct Phillips Curve

- e

U0Un

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Applying Okun’s Law

)(2

1n

A

AP

en

UUY

YY

UU

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Restating Okun’s Law

)(

e

A

AP

Y

YY

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Restating Okun’s Law

)(

e

A

Af

Y

YY

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Graphing the Function

- e

0Un

- e

0

Yf

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Our Starting Point

SSRSLR

D

H*

w*

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Our Starting Point

SSRSLR

D

H*

w*Fortunately a couple of

simple steps will reconcile these two graphs

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Restating the Graph

• Po= Price Level last year (or period)

• P = Po(1+)

• Pe= Po(1+e)- e

0Yf

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Restating the Graph

- e

0Yf

)|(

)(1

)(

)(1

e

e

o

e

e

o

e

PPPY

PPP

ffY

PPP

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The P curve

Pe

P

Yf

P

Y=P(P)

- e

0Yf

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The P curve

Pe

P

Yf

P

Y=P(P)• P > Pe:

Y>Yf.

• P <Pe:

Y<Yf.

• P = Pe,

Y=Y(Pe)Yf

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The Intuition

Pe

P

Yf

P

Y=P(P)

PwwR

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Our Basic Graph

Y

M

Pe

re

P

Yf

P P

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The Y and M Curves

Y

M

Pe

re

P

A familiar friend

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The Y and M Curves

Y

M

Pe

re

P Because Y=P(P),

the shapes of the Y and M curves are

slightly altered.

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A Problem

Y

M

Pe

P

Yf

P PY<Yf

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A Problem

Y

M

Pe

P

Yf

P PY<YfThe nation decides to build a monument to

Irving Fisher, financed by taxing every individual $10

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A Problem

Y

M

Pe

P

Yf

P PY<YfThe nation decides to build a monument to

Irving Fisher, financed by taxing every individual $10

Will this Help?

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The Auctioneer’s View

Y

M

Pe

P

Yf

P PThe increase in

government spending on the monument more than offsets the

reduction in consumption

because of the decrease in wealth.

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The Auctioneer’s View

Y

M

Pe

P

Yf

P PThe increase in

government spending on the monument more than offsets the

reduction in consumption

because of the decrease in wealth.

At any point along the Y

curve YD>YS. The

Y curve shifts up

and to the right

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The Auctioneer’s View

Y

M

Pe

P

Yf

P PThe reduction in

wealth also means the M curve shifts up and to the left.

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The Auctioneer’s View

Y

M

Pe

P

Yf

P PP up; r (?); Y up

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The Auctioneer’s View

Y

M

Pe

P

Yf

P PP up; r (?); Y upOnce

again, Irving

saves the day!

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Our Starting Point

SSRSLR

D

H*

w*

Beforehand, we did our analysis in

terms of this graph. Have

we left something out?

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Our Starting Point

SSRSLR

D

H*

w*

Beforehand, we did our analysis in

terms of this graph. Have

we left something out?

No. That is the point of the P curve, which incorporates how H increases

with P

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Another Objection

• Workers know the (well-deserved) monument is coming, and with it increased government purchases..

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Another Objection

• Workers know the (well-deserved) monument is coming, and with it increased government purchases..

Might we get a change in

expectations?

PwwR

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Another Objection

• Workers know the (well-deserved) monument is coming, and with it increased government purchases..

Might we get a change in

expectations?

PwwR Perhaps, but lets keep this simple.

No shift in P curve

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Another Objection

• Workers know the (well-deserved) monument is coming, and with it increased government purchases..

Might we get a change in

expectations?

PwwR Perhaps, but lets keep this simple.

No shift in P curve

We return to this issue later

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The Basic Model

Y

M

Pe

re

P

Yf

P P

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Summary

Y

M

Pe

P

Yf

P P

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End

©2004 Charles W. Upton. All rights reserved