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 fanfare is equal to expected inflation when the unemployment lay is at the inseparable level. In other words, the unemployment enume browse differs from the natural rate when expected inflation does not satisfy actual inflation. Unemployment is then substituted with output, y, and we end at equation 1. (See elevate story below). The parameter g de bourneines how much a oddment between output and potential output affects the inflation rate. In the model, y is the record of gross domestic product. This makes sense, because we are unremarkably interested in dower increases in GDP. Using the pound get means that a steady growth gives a linear exercise, whereas without the log form we would have t o 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 commencement ceremony 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 frame money balances. If prices are growing at a high rate than the money carnation, the stock of real money balances get out decrease, and thus the nominal inter est rate will increase. Equally, when the st! ock of money is growing faster than prices, the stock of real money... If you inadequacy to get a full essay, club it on our website: BestEssayCheap.com

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