The Economy 2.0: Macroeconomics

Take a closer look at the units of the The Economy 2.0: Macroeconomics – what they’re about, what models they present, how they’re changing compared with The Economy 1.0.

 

Unit 4 — Inflation and unemployment

Summary

In this unit, students learn how to measure inflation, understand how inflation and deflation affect the choices made by households and firms, and understand the origin of inflation in conflicts of interest between workers and the owners of firms.

 

Models

The Phillips curve is derived by combining the supply- and demand-side models of Units 1 and 3. The key concept is the bargaining gap, which arises whenever employment is different from its equilibrium level. This framework together with the concept of inflation expectations provides the model of inflation and how it changes over the business cycle and in response to supply shocks. The model covers cost-push, demand-pull, expectations-driven and sellers’ or profit-push inflation.

 

Applications

The model for inflation and unemployment is applied to understand:

  • Global oil and other commodity price shocks.
  • The return of inflation after the COVID-19 pandemic.

 

Major changes

By the end of Unit 4, students have added a model of inflation and supply shocks to the macro model. Although the basic modelling is similar to Unit 15 from The Economy 1.0, the role of policy and central banks is postponed to Unit 5.


← See how Unit 3 is changing See how Unit 5 is changing →