Reading 25: Inflation, Unemployment and Business Cycles

CFAI (24 pages), SCW (9 pages)

Lessons Learned:

• Finally a chapter on inflation
• I am finding that highlight the lines progression/movement distinguishes patterns and differences in both texts
• Phillips curve initially made no sense, but I read it again after a short break and it is fairly clear
• Half of this chapter started with “recall that……”
• CFAI chapter clarified a lot of particular, however, I still skim most of the examples (there are a LOOOOOOOOOOOT)
• I wasn’t aware you had to use the financial calculators TVM function to compute compound annual inflation, however, after reflecting back the word “compound” really should have set off that metaphorical bell
• It is not inflation if there is a single price increase or only the price of a select group increases.
• The growth of the quantity of money is the main source of persistent increases in aggregate demand
• Stagflation is the combination of rising price levels and decreasing real GDP
• Cost-push inflation spiral; the attempt to restore equilibrium by injecting money increases prices and reduces real gdp (eventually causing stagflation)
• A change in the expected inflation rate shifts the short-run Phillips curve but not the LRPC
• A change in the natural employment rate shifts both the SRPC and the LRPC (CFAI)
• Potential GDP grows at a steady rate while aggregate demand grows at a fluctuating rate
• Growth, inflation, and business cycles arise from the relentless increases in potential GDP, faster increases in aggregate demand and fluctuations in the pace of AD growth
• If initially, technology change makes a sufficient amount of existing capital – especially human – obsolete, productivity temporarily decreases due to the destroyed jobs (CFAI)

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