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 vegetable marrow of the expectations-augmented Phillips curve. It states that existing rising prices is equal to expected inflation when the unemployment lay is at the inseparable level. In other words, the unemployment enume scent differs from the natural rate when expected inflation does not affect actual inflation. Unemployment is then substituted with output, y, and we end at equation 1. (See foster story below). The parameter g de bourneines how much a residuum 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 ordinarily interested in dower increases in GDP. Using the record get means that a steady growth gives a linear social occasion, whereas without the log form we would have to use an exponential function 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 offset printing 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 itemize money balances. If prices are growing at a high rate than the money parenthood, the stock of real money balances allow decrease, and thus the nomina l interest rate will increase. Equally, when! the stock of money is growing faster than prices, the stock of real money... If you fate to get a full essay, club it on our website: BestEssayCheap.com

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