TABLE 14-1 The Variables and Parameters in the Dynamic AD–AS Model
| Endogenous Variables | |
| Yt | Output |
| πt | Inflation |
| rt | Real interest rate |
| it | Nominal interest rate |
| Etπt+1 | Expected inflation |
| Exogenous Variables | |
|
Natural level of output |
| πt* | Central bank’s target for inflation |
| ϵt | Shock to the demand for goods and services |
| vt | Shock to the Phillips curve (supply shock) |
| Predetermined Variable | |
| πt–1 | Previous period’s inflation |
| Parameters | |
| α | The responsiveness of the demand for goods and services to the real interest rate |
| ρ | The natural rate of interest |
| ϕ | The responsiveness of inflation to output in the Phillips curve |
| θπ | The responsiveness of the nominal interest rate to inflation in the monetary-policy rule |
| θY | The responsiveness of the nominal interest rate to output in the monetary-policy rule |