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Chapter 16 microfoundations of macroeconomic policy

1. Key terms – matching and translation.

Read aloud the key term and its definition so that they make up a single sentence. (Remember about the agreement between the subject and the predicate!). Translate the sentences you have arrived at from English into Russian.

wealth effect	The labor market consists of primary and secondary sectors.
stagflation	Can exist in the short run, but not in the long run.
demand-side inflation	Employment rises in the initial stage.
money (inflation) illusion	Reduces investment when the price level rises.
incomes policies	Purchasing power of assets falls when prices rise.
supply-side inflation	Generates a clockwise adjustment path of the price level versus real output.
efficiency wages	Intended to raise the cost of dismissal and reduce shirking by employees.
labor contracts	Attempts to curb inflation without cutting Aggregate Demand.
interest rate effect	Explains in part why wages adjust slowly.
dual labor markets	Inflationary recession.

2. Text translation.

Translate the text from English into Russian in writing paying particular attention to the translation of the economic terms in bold as well as words and phrases relevant to the subject of the text. Read out your translation in class and introduce the necessary corrections.

Microfoundations of macroeconomic policy

Chapter Objectives

After you have read and studied this chapter you should be able to explain the foundations of Aggregate Supply and Demand curves and how changes in their major determinants cause these curves to shift; discuss the processes of supply-side and demand-side inflation; and describe patterns of employment and unemployment across different types of business cycles.

Chapter Review: Key Points

1. Most economists, whether classically-oriented or Keynesians, now agree that, in the long run, Aggregate Supply curves are vertical. However, the new Keynesians contend that wage and price stickiness can make the short run Aggregate Supply curve positively-sloped for lengthy periods, and thus short run targets may be most appropriate for macroeconomic policymaking.

2. Long-term labor contracts (whether implicit or explicit), efficiency wages, and dual labor markets all provide microfoundations to help explain wage stickiness and involuntary unemployment in an Aggregate Demand/Aggregate Supply framework.

3. Declines in the Aggregate Supply curve trigger supply-side inflation and reduces real income and output. Demand-side inflation results from rapid increases in the Aggregate Demand curve, and is usually preceded by higher income and output.

4. If Aggregate Demand grows excessively in a fully employed economy, the first phase of the demand-side cycle entails rising prices, outputs, employment, and incomes. In the second phase, supply-side adjustments to the demand-originated disturbances drive up prices further, but total employment, production, and income fall. Demand-side inflation induces a path of counterclockwise adjustment of real output versus inflation. If the economy starts at less than full employment, only the first phase necessarily occurs when Aggregate Demand is increased.

5. Supply-side inflation generates a clockwise adjustment pattern. In the first phase of a supply-side (cost-push) cycle, prices rise while real output and incomes tall. If the government attempts to correct for the resulting inflationary recession by increasing Aggregate Demand, the second phase occurs—prices continue to rise, but real output and income rise as well.

6. Stagflation, a contraction of the terms stagnation and inflation, is the simultaneous occurrence of high rates of both unemployment and inflation.

7. Mild demand-side inflation accompanied the prosperity of the 1960s. From the mid-1970s into the early 1980s, stagflation took over. Whether this stagflation was the supply-adjustment phase of the earlier demand-pull cycle or originated from supply-related shocks cannot be established conclusively. It seems likely, however, that even if the economy had been stable when the supply shocks listed previously emerged, considerable supply-side inflation would have plagued the American economy from 1973 to 1980.

8. Disinflation is a significant reduction in the rate of inflation. Most people adjust their behavior if they expect inflation. Their expectations cause disinflation to entail losses in real income before it restores the economy to a relatively stable growth path. Thus, the 1981-83 recession was especially severe.

9. In recent decades, accelerating technological advances and the internationalization of economic activity have increased the speed of structural economic change. A massive wave of corporate mergers in the 1980s and 1990s has lead to significant corporate down­sizing, with reduced job security for many workers who had intended to be career employees at large firms.

3 Vocabulary practice: switching.

Get ready for an oral (written) translation exercise based on the economic terms in bold, as well as other relevant words and phrases from the text.

Contend; сокращение размеров компаний; corporate merger; стоимость увольнения; demand-originated disturbances; негибкость цен и заработной платы; demand-pull inflation; микроэкономические основания; demand-side cycle; demand-side inflation; снижение темпов роста цен; macroeconomic policymaking; потрясения; high rate of unemployment; рынок труда с двойным режимом; accelerate slightly; набирающий темпы технический прогресс; across business cycles; регулировать свое поведение; area of comparative advantage; повышать совокупный спрос; career employee; последователь классической экономической теории; clockwise adjustment path; экономическая деятельность; efficiency wages; возникать\появляться; entail losses in real income; окончательно установить ч-либо; explicit labour contracts; содействовать повышению эффективности; in the initial stage; в краткосрочном плане; stagflation; политика регулирования доходов; individual preferences for work over leisure; экономика с полным уровнем занятости; induce; инфляционный спад; interest rate effect; вынужденная безработица; implicit labour contracts; гарантия занятости; generate; расти чрезмерно; high rate of inflation; резкий подъем ставок заработной платы в денежном выражении; in an AD\AS framework; отчасти, частично; counterclockwise adjustment pattern; договор личного найма; labour supplies; определяющий фактор; market-clearing wages; широкая волна корпоративных слияний; money (inflation) illusion; инфляционный спад; shift; shirking by employees; краткосрочные цели; simultaneous occurrence; начинать с более низкого чем полный уровень занятости; supply shock; supply-related shocks; supply-side (cost-push) cycle; происходить\иметь место; pattern of employment; обрушиться на экономику; necessarily; направленная вверх и вправо кривая; precede; процветание\успех; versus; уменьшить гарантии занятости; wealth effect; пересматривать договор личного найма; restore the economy to a relatively stable growth path; возникающий в результате; вызванная повышением предложения над спросом инфляция; take over; вызывать\провоцировать инфляцию; yield higher unemployment.