Chapter 27: Issues in Macroeconomic Theory and Policy
1. It is worth making sure the increasing steepness of the Phillips curve at lower unemployment rates is
connected to the logic of fooling people into changing their behavior by changing inflation.
3. You might want to make an analogy between manipulating a Phillips curve policy menu (assumed to be
stable) and Mickey Mouse in The Sorcerer s Apprentice. The apprentice knew enough to start the
4. You might want to show students that one reason to use the Phillips curve model rather than AS/AD in
an inflationary environment is that it is a simpler way to see inflation dynamics (e.g., a stable Phillips
5. Make sure students see that in the adaptive expectations standard Phillips curve model, the only way
to decrease inflation (and therefore decrease expected inflation) is by causing a recession, raising
unemployment above its natural rate by fooling people with lower than expected inflation.
6. Note that a persistent attempt to fool people with higher inflation, as people adjust, will ultimately lead
to hyperinflation.
7. In the SR and LR Phillips curve analysis it is useful to think of the natural rate of unemployment as a
8. Note that if you are fooled into increasing output and employment by a monetary policy rprise
increasing inflation, looking back, while measured output will have risen, you will consider yourself worse
9. Note that under rational expectations, while accurate expectations imply that a change in government
policy can have not beneficial real effect, it is also possible for people to underestimate resulting
10. An interesting rational expectations illustration is the fact that as part of Robert Lucas divorce
11. A good illustration of expectations is how little students like unexpected pop quizzes, versus
scheduled tests. A further such illustration is exam difficulty and student expectations (What if everyone
got what they expected for questions? What if the questions asked something students didn t expect or
they were substantially harder or easier than expected?)
13. A good analogy to the difficulty of conducting stabilization policy in a world where predicting people s
14. You might want to note to students that a negative supply shock (that requires a substantial change
in relative prices), such as an increased price of oil, will require greater inflation to adjust to in a
substantially indexed economy.
15. It is a good idea to remind students that the ability to change AD is a very different thing than the
ability to stabilize the economy by changing AD.
16. The rational expectations idea that households and firms will very quickly adapt, so that policy has
17. It can be useful to use the section on Controversies in Macroeconomic Policy to review the different
schools of thought and why they come to the conclusions they do about the effectiveness of
18. It can be worth reminding students that the shorter inside lag for monetary policy is an advantage
19. In discussing central bank independence, it is worth referring back to the way the Fed finances its
20. The monetary growth rule section can be profitably tied back to the growth version of the equation of
exchange, combined with long term real growth potential estimates of around 3% per year.
21. In the example of inflation targeting, it might be worth graphically illustrating the case of a negative
22. The asset price inflation discussion should be tied back to the earlier discussion of price indices by
reminding students that those measures do not take into account changes in asset prices.