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I was playing around with the Phillips Curve, Okun's law and the AD-relation in an excel document, trying to simulate a reduction in the inflation rate. However, when tried to link the nominal money growth to inflation a loop occurred, as it is dependent on the inflation which depends on unemployment, which again in dependent on real money growth, which depends on nominal money growth.

How I solved it was that unemployment rather depended on last years real money growth. The assumtion is then that when companies first adjusts their numbers after they realize income has gone down. Is this a reasonable assumtion? Or am I missing some essential parts of this theory?

Im attaching the Excel-document I was playing with.

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i had a quick play around with your spreadsheet...i noticed that if you put an unemployment rate of 7.0 and an an inflation rate of 8.0 as the base year, by year 2 growth is up but so is unemployment....i cant think of many plausible ways of having rapid output growth but raging unemployment...


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