Summary
Summary ECON 0016 IS-PC-MR Mechanics UCL
- Course
- Institution
Document explaining adjustment of demand, supply and inflation shocks using the 3 equation model (IS-PC-MR). Includes step-by-step adjustment. Final mark: 75%
[Show more]
Seller
Follow
joelchoo
Reviews received
Content preview
Overviewis pc mismodel
It Demand
consumption
nondurabledurablehousing
a i
y
I
F ws
sum
imperfectlycompetitivelabour
Naru
ng Ps
Psbyfirms
usbyworkersfirms
w adjinline w the
Tat190bang41
y
F1 support
TI Mr
bestresponsetodifferentPc
bestrtogett
, Assumeadaptiveexpectations TL Tet
Timeline when using the IS-PC-MR model
at
Period starts
1. Any interest rate change from the previous period affects output.
I r onlyHasEffectonly onNextPERIOD
2. Shocks happen.
AFTERADisdetermined
3. Expectations of inflation for this period are updated. If there’s an inflationary TCupdated
shock, expected inflation changes to reflect the shock.
ate
4. Nominal wages are set based on expected inflation and the level of
employment. This puts the expected real wage onto the WS curve. AW tomaintainWp
5. Firms set prices as a markup over the nominal wage. This moves the real Te Ap to
wage onto the PS curve and the change in the price level is the rate of inflation. maintain
µ
6. Now the economy is on the IS and PC curves.
7. If inflation and / or output are different from the Central Bank’s (CB’s) targets
(the medium run equilibrium)
ye
I
(a) Since interest rates only affect demand with a one-period lag, the CB itwouldbe
forecasts the position of the PC in the next period by working out what
Ifrencast inflation expectations will be next period.
monpolicy
ti eeoutput it must choose to get on its MR curve in the
(b) This tells it the level of
next period.
REFITse
(c) It then forecasts the IS curve next period by judging whether any shock to
the IS curve is temporary or permanent to work out what level of interest
rates it must set now to achieve this output level.
temp smallA r
(d) The CB sets interest rates.
perm bigA r
Period ends
y
t
, t o
M RE
I shock Ir
Tc
Aprices y ye
positive
outputGap
Er
I unemployment
Tbargainingpower
forecastPc
A nomwage
set r Tc
Aprices
Ez
new
eq
forecastPc
set r
, Analysis
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller joelchoo. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $9.18. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
81113 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now