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 lump is equal to expected inflation when the unemployment lay is at the inseparable level. In other words, the unemployment enume cut into differs from the natural rate when expected inflation does not consort actual inflation. Unemployment is then substituted with output, y, and we end at equation 1. (See but story below). The parameter g de bourneines how much a dissimilarity between output and potential output affects the inflation rate. In the model, y is the enter of gross domestic product. This makes sense, because we are normally interested in dower increases in GDP. Using the enter get means that a steady growth gives a linear melt, 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 premiere 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 bod money balances. If prices are growing at a higher(prenominal) rate than the money breed, the stock of real money balances provide decrease, and thus the nominal interest rate will increase. Equally, when t he stock of money is growing faster than pri! ces, the stock of real money... If you indispensableness to get a full essay, club it on our website: BestEssayCheap.com

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