14. aggregate supply unemployment and inflation
-
Upload
ashish-gupta -
Category
Education
-
view
649 -
download
2
Transcript of 14. aggregate supply unemployment and inflation
![Page 1: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/1.jpg)
Aggregate Supply,Aggregate Supply,UnemploymentUnemployment
and Inflationand Inflation
![Page 2: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/2.jpg)
Aggregate Supply, Unemployment and Inflation
Aggregate Supply
![Page 3: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/3.jpg)
AGGREGATE SUPPLY
• Different views on the shape of the AS curve
![Page 4: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/4.jpg)
O
Pric
e le
vel
National output
P
AS
Contrasting views on the aggregate supply curve:(a) Extreme Keynesian
![Page 5: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/5.jpg)
OAD1
Pric
e le
vel
National outputY1
P
Contrasting views on the aggregate supply curve:(a) Extreme Keynesian
AS
YF
![Page 6: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/6.jpg)
Contrasting views on the aggregate supply curve:(a) Extreme Keynesian
O Y1
Pric
e le
vel
National output
AD2
P
AS
YFY2
AD1
![Page 7: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/7.jpg)
O
AS
Pric
e le
vel
National output
Y
Contrasting views on the aggregate supply curve:(b) Extreme Monetarist / New Classical
![Page 8: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/8.jpg)
Contrasting views on the aggregate supply curve:(b) Extreme Monetarist / New Classical
AS
P1
O
Pric
e le
vel
National output
AD1
Y
![Page 9: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/9.jpg)
Contrasting views on the aggregate supply curve:(b) Extreme Monetarist / New Classical
AS
O
P1
Pric
e le
vel
National output
AD2
P2
Y
AD1
![Page 10: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/10.jpg)
O
Pric
e le
vel
National output
AS
Contrasting views on the aggregate supply curve:(c) Moderate view
![Page 11: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/11.jpg)
Contrasting views on the aggregate supply curve:(c) Moderate view
O
AS
Pric
e le
vel
National outputY1
P1
AD1
![Page 12: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/12.jpg)
Contrasting views on the aggregate supply curve:(c) Moderate view
P2
O
AS
Y1
Pric
e le
vel
National outputY2
P1
AD2
AD1
![Page 13: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/13.jpg)
AGGREGATE SUPPLY
• Different views on the shape of the AS curve
• Short-run aggregate supply
![Page 14: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/14.jpg)
AGGREGATE SUPPLY
• Different views on the shape of the AS curve
• Short-run aggregate supply– the microeconomic foundations
![Page 15: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/15.jpg)
Q1
Short-run response of a profit-maximising firmto a rise in demand
MC
AR1
MR1
£
Q
P1
![Page 16: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/16.jpg)
AR1
MR1
P1
Q1
AR2
MR2
£
Q
MC
Short-run response of a profit-maximising firmto a rise in demand
![Page 17: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/17.jpg)
MR1
P1
Q1 MR2Q2
P2
£
Q
MC
Short-run response of a profit-maximising firmto a rise in demand
AR1
AR2
![Page 18: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/18.jpg)
AS short run
The short-run aggregate supply curve
National output
AD1
P1
Y1
AD2
P2
Y2
AD3
P3
Y3
Pric
e le
vel
![Page 19: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/19.jpg)
AGGREGATE SUPPLY
• Different views on the shape of the AS curve
• Short-run aggregate supply– the microeconomic foundations
• Long-run aggregate supply
![Page 20: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/20.jpg)
AGGREGATE SUPPLY
• Different views on the shape of the AS curve
• Short-run aggregate supply– the microeconomic foundations
• Long-run aggregate supply– the interdependence of firms
![Page 21: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/21.jpg)
AS (long run) AS2 (short run)
AD1
Pric
e le
vel
National output
a
AD2
bc
AS1 (short run)
The long-run AS curve when firms are interdependent
![Page 22: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/22.jpg)
AGGREGATE SUPPLY
• Different views on the shape of the AS curve
• Short-run aggregate supply– the microeconomic foundations
• Long-run aggregate supply– the interdependence of firms– investment
![Page 23: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/23.jpg)
Effect of investment on the long-run AS curve
AD1
Pric
e le
vel
National output
a
AS1 (short run)
![Page 24: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/24.jpg)
AS (long run)
AS2 (short run)
AD1
Pric
e le
vel
National output
a
AD2
b
d
AS1 (short run)
Effect of investment on the long-run AS curve
![Page 25: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/25.jpg)
AGGREGATE SUPPLY
• Different views on the shape of the AS curve
• Short-run aggregate supply– the microeconomic foundations
• Long-run aggregate supply– the interdependence of firms– investment– expectations
![Page 26: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/26.jpg)
AGGREGATE SUPPLY
• LRAS: monetarist / new classical model– flexible real wage rates
![Page 27: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/27.jpg)
ASL
O
Number of workers
Rea
l wag
e ra
te (W
/ P
)
ADL
We
Qe
N
a b
The aggregate labour market: Monetarist / New Classical analysis
![Page 28: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/28.jpg)
O
Number of workers
Rea
l wag
e ra
te (W
/ P
)
ADL
We
Qe
a b
Assume nowthat AD rises
NASL
The aggregate labour market: Monetarist / New Classical analysis
![Page 29: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/29.jpg)
O
Number of workers
Rea
l wag
e ra
te (W
/ P
)
ADL
We
Qe
a b
Prices rise.Real wage ratefalls below We
e.g. to W1
W1
NASL
The aggregate labour market: Monetarist / New Classical analysis
![Page 30: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/30.jpg)
O
Number of workers
Rea
l wag
e ra
te (W
/ P
)
ADL
We
Qe
a b
This gives anexcess demand
for labour of d c.Real wage rate
will rise back to Wec d
W1
NASL
The aggregate labour market: Monetarist / New Classical analysis
![Page 31: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/31.jpg)
AGGREGATE SUPPLY
• LRAS: monetarist / new classical model– flexible real wage rates– no money illusion
![Page 32: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/32.jpg)
AGGREGATE SUPPLY
• LRAS: monetarist / new classical model– flexible real wage rates– no money illusion– natural level of unemployment
![Page 33: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/33.jpg)
O
Number of workers
Rea
l wag
e ra
te (W
/ P
)
ADL
We
Qe
a b
NASL
The aggregate labour market: Monetarist / New Classical analysis
![Page 34: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/34.jpg)
AGGREGATE SUPPLY
• LRAS: monetarist / new classical model– flexible real wage rates– no money illusion– natural level of unemployment– implications for shape of LRAS
• LRAS: Keynesian models
![Page 35: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/35.jpg)
AGGREGATE SUPPLY
• LRAS: monetarist / new classical model– flexible real wage rates– no money illusion– natural level of unemployment– implications for shape of LRAS
• LRAS: Keynesian models– wage and price rigidity
![Page 36: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/36.jpg)
N
ADL1
ASL
Keynesian analysis of the aggregate labour market: fall in ADL
O
Number of workers
Rea
l wag
e ra
te (W
/ P
)
We
Qe
a b
ADL2
Q2
Assumption:wage rates are
sticky downwardsc
![Page 37: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/37.jpg)
AGGREGATE SUPPLY
• LRAS: monetarist / new classical model– flexible real wage rates– no money illusion– natural level of unemployment– implications for shape of LRAS
• LRAS: Keynesian models– wage and price rigidity– hysteresis
![Page 38: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/38.jpg)
Keynesian analysis of the aggregate labour market: hysteresis
O
Number of workers
Rea
l wag
e ra
te (W
/ P
)
We
Qe
a b
ADL1ADL2
c
Q2
Assume that thereis now a recovery:
ADL rises back to ADL1.
NASL
![Page 39: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/39.jpg)
O
Number of workers
Rea
l wag
e ra
te (W
/ P
)
We
Qe
a b
ADL1ADL2
c
Q2
There will be amovement up
along ASL2
ASL2
d eWe2
Keynesian analysis of the aggregate labour market: hysteresis
NASL
![Page 40: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/40.jpg)
AGGREGATE SUPPLY
• LRAS: monetarist / new classical model– flexible real wage rates– no money illusion– natural level of unemployment– implications for shape of LRAS
• LRAS: Keynesian models– wage and price rigidity– hysteresis– expectations of output changes
![Page 41: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/41.jpg)
AGGREGATE SUPPLY
• LRAS: monetarist / new classical model– flexible real wage rates– no money illusion– natural level of unemployment– implications for shape of LRAS
• LRAS: Keynesian models– wage and price rigidity– hysteresis– expectations of output changes– long-run money illusion
![Page 42: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/42.jpg)
AGGREGATE SUPPLY
• AS, AD and inflation
– demand-pull inflation
![Page 43: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/43.jpg)
O
National output
Pric
e le
vel
AS
ADAD1
P1 b
AD2
Subsequentsupply response
AS1
P2
P3
aP0
d
c
Demand-pull inflation
![Page 44: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/44.jpg)
O
National output
Pric
e le
vel
AS
AD
P0
AD1
P1
ab
AD2
c
Subsequentdemand response
AS1
d
P2
P3
AD3
P4
e
Demand-pull inflation
![Page 45: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/45.jpg)
O
National output
Pric
e le
vel
AS
AD
P0
AD1
P1
ab
AD2
c
AS1
d
P2
P3
AD3
P4
e
Subsequentsupply response
AS2
P5f
Demand-pull inflation
![Page 46: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/46.jpg)
O
National output
Pric
e le
vel
AS
AD
P0
AD1
P1
ab
AD2
c
AS1
d
P2
P3
AD3
P4
e
AD4
Subsequentdemand response
AS2
fP5
P6
g
Demand-pull inflation
![Page 47: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/47.jpg)
AGGREGATE SUPPLY
• AS, AD and inflation
– demand-pull inflation
– cost-push inflation
![Page 48: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/48.jpg)
O
National output
Pric
e le
vel
AS
ADAD1
P1
AS1
P2
P3
Subsequentdemand response
AS2
d
P0
ab
c
Cost-push inflation
![Page 49: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/49.jpg)
O
National output
Pric
e le
vel
AS
AD
P0
AD1
P1 ab
c
AS1
d
P2
P3
P4 Subsequentsupply response
AS2
AS3
e
Cost-push inflation
![Page 50: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/50.jpg)
AGGREGATE SUPPLY
• AS, AD and inflation
– demand-pull inflation
– cost-push inflation
– what causes inflation in practice?
![Page 51: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/51.jpg)
Expectations Augmented Phillips
Curve
Aggregate Supply, Unemployment and Inflation
![Page 52: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/52.jpg)
EXPECTATIONS AUGMENTED PHILLIPS CURVE
• Incorporating expectations into a Phillips equation
• Adaptive expectations
• The accelerationist theory– attempting to reduce unemployment below
the ‘natural’ level
![Page 53: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/53.jpg)
0
4
8
12
16
20
0
P (%).
U (%)6 8I (Pe = 0)
.
b
The accelerationist theory of inflation
a
![Page 54: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/54.jpg)
IV (Pe = 12%).
III (Pe = 8%).
II (Pe = 4%)
P (%).
U (%)6
a
b c
d
8I (Pe = 0)
.
.
e
The accelerationist theory of inflation
f
0
4
8
12
16
20
0
![Page 55: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/55.jpg)
EXPECTATIONS AUGMENTED PHILLIPS CURVE
• Incorporating expectations into a Phillips equation
• Adaptive expectations
• The accelerationist theory– attempting to reduce unemployment below
the ‘natural’ level
– the long-run Phillips curve
![Page 56: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/56.jpg)
Un
0
4
8
12
16
20
0
P (%).
U (%)6 8
The long-run Phillips curve
![Page 57: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/57.jpg)
EXPECTATIONS AUGMENTED PHILLIPS CURVE
• Incorporating expectations into a Phillips equation
• Adaptive expectations
• The accelerationist theory– attempting to reduce unemployment below
the ‘natural’ level
– the long-run Phillips curve
– effects of deflationary policies
![Page 58: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/58.jpg)
0
2
4
6
8
10
12
14
16
18
20
22
24
0
P (%).
U (%)8 13
J
X (Pe = 20%).
k
The effects of deflation
![Page 59: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/59.jpg)
0
2
4
6
8
10
12
14
16
18
20
22
24
0
P (%).
U (%)8 13
k
X (Pe = 20%).
XI (Pe = 18%).
XII (Pe = 16%).
l
J
m
The effects of deflation
![Page 60: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/60.jpg)
0
2
4
6
8
10
12
14
16
18
20
22
24
0
P (%).
U (%)8 13
k
l
m
a
J
The effects of deflation
![Page 61: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/61.jpg)
• How quickly can inflation be eliminated?– the ‘short, sharp shock’– the slow route
• Explanations of stagflation– clockwise Phillips loops
EXPECTATIONS AUGMENTED PHILLIPS CURVE
![Page 62: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/62.jpg)
Year 20
20
0
P (%).
U (%)Un
ab
c
Year 0, 1
Clockwise Phillips loops
![Page 63: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/63.jpg)
Year 5
Year 4
0
20
0
P (%).
U (%)Un
ab
c
d
e f
Year 0, 1
Year 2
Year 3
Clockwise Phillips loops
![Page 64: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/64.jpg)
0
20
0
P (%).
U (%)Un
ab
c
d
e f
h
i
J
Year 0, 1, 10
Year 2, 9
Year 3, 8
Year 4, 7
Year 5, 8
Clockwise Phillips loops
g
![Page 65: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/65.jpg)
• How quickly can inflation be eliminated?– the ‘short, sharp shock’– the slow route
• Explanations of stagflation– clockwise Phillips loops– rightward shifts in the long-run Phillips
curve
EXPECTATIONS AUGMENTED PHILLIPS CURVE
![Page 66: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/66.jpg)
• How quickly can inflation be eliminated?– the ‘short, sharp shock’– the slow route
• Explanations of stagflation– clockwise Phillips loops– rightward shifts in the long-run Phillips
curve
• Policy implications of the model
EXPECTATIONS AUGMENTED PHILLIPS CURVE
![Page 67: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/67.jpg)
• How quickly can inflation be eliminated?– the ‘short, sharp shock’– the slow route
• Explanations of stagflation– clockwise Phillips loops– rightward shifts in the long-run Phillips
curve
• Policy implications of the model– shifting the long-run Phillips curve
EXPECTATIONS AUGMENTED PHILLIPS CURVE
![Page 68: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/68.jpg)
0
2
4
6
8
10
12
14
16
18
20
22
24
26
0 1 2 3 4 5 6 7 8 9 10 11 12 13
75
74
8076
77
79
7173
7278
90
89
97
96
9188
95
82
8384
85
86
93
8792
94
81
Inflation (%)
Unemployment (%)
99
98
Phillips loops in the UK?
0001
02
![Page 69: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/69.jpg)
0
2
4
6
8
10
12
14
16
18
20
22
24
26
0 1 2 3 4 5 6 7 8 9 10 11 12 13
75
74
8076
77
79
7173
7278
90
89
97
96
9188
95
82
8384
85
86
93
8792
94
81
Inflation (%)
Unemployment (%)
99
98
Phillips loops in the UK?
0001
02
![Page 70: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/70.jpg)
0
2
4
6
8
10
12
14
16
18
20
22
24
26
0 1 2 3 4 5 6 7 8 9 10 11 12 13
75
74
8076
77
79
7173
7278
90
89
97
96
9188
95
82
8384
85
86
93
8792
94
81
Inflation (%)
Unemployment (%)
99
98
Phillips loops in the UK?
0001
02
![Page 71: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/71.jpg)
0
2
4
6
8
10
12
14
16
18
20
22
24
26
0 1 2 3 4 5 6 7 8 9 10 11 12 13
75
74
8076
77
79
7173
7278
90
89
97
96
9188
95
82
8384
85
86
93
8792
94
81
Inflation (%)
Unemployment (%)
99
98
Phillips loops in the UK?
0001
02
![Page 72: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/72.jpg)
0
2
4
6
8
10
12
14
16
18
20
22
24
26
0 1 2 3 4 5 6 7 8 9 10 11 12 13
75
74
8076
77
79
7173
7278
90
89
97
96
9188
95
82
8384
85
86
93
8792
94
81
Inflation (%)
Unemployment (%)
99
98
Phillips loops in the UK?
0001
02
![Page 73: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/73.jpg)
0
2
4
6
8
10
12
14
16
18
20
22
24
26
0 1 2 3 4 5 6 7 8 9 10 11 12 13
75
74
8076
77
79
7173
7278
90
89
97
96
9188
95
82
8384
85
86
93
8792
94
81
Inflation (%)
Unemployment (%)
99
98
Phillips loops in the UK?
0001
02
![Page 74: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/74.jpg)
Rational Expectations and the Phillips Curve
Aggregate Supply, Unemployment and Inflation
![Page 75: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/75.jpg)
RATIONAL EXPECTATIONS AND THE PHILLIPS CURVE
• Assumptions
– flexible wages and prices
– rational expectations
• Aggregate supply & the Phillips curve: when expectations are correct
– short-run vertical AS curve
![Page 76: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/76.jpg)
O
Pric
e le
vel
National output
AD1
SRAS1 (expected price level = P1)
Q1
AD2
a
P2
Q2
P1
(a) Adaptiveexpectationsb
The effects of an increase in aggregate demand
![Page 77: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/77.jpg)
O
Pric
e le
vel
National output
AD1
SRAS1 (expected price level = P1)
P1
Q1
AD2
a
bP2
Q2
SRAS2 (expected price level = P3 )
P3
(a) Adaptiveexpectations
c
The effects of an increase in aggregate demand
![Page 78: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/78.jpg)
O
Pric
e le
vel
National output
AD1
SRAS1 (expected price level = P1)
P1
Qn
AD2
a
bP2
Q2
SRAS2 (expected price level = P3 )
cP3
LRAS
(a) Adaptiveexpectations
The effects of an increase in aggregate demand
![Page 79: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/79.jpg)
O
Pric
e le
vel
National output
AD1
SRAS1 (expected price level = P1)
Q1
P1
(b) Rationalexpectations
AD2
a
The effects of an increase in aggregate demand
![Page 80: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/80.jpg)
O
Pric
e le
vel
National output
AD1
SRAS1 (expected price level = P1)
Q1
aP1
AD2
SRAS2 (expected price level = P3 )
P3
c
(b) Rationalexpectations
The effects of an increase in aggregate demand
![Page 81: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/81.jpg)
O
Pric
e le
vel
National output
AD1
SRAS1 (expected price level = P1)
aP1
AD2
SRAS2 (expected price level = P3 )
cP3
Qn
LRAS = SRAS actual
(b) Rationalexpectations
The effects of an increase in aggregate demand
![Page 82: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/82.jpg)
RATIONAL EXPECTATIONS AND THE PHILLIPS CURVE
• Assumptions
– flexible wages and prices
– rational expectations
• Aggregate supply & the Phillips curve: when expectations are correct
– short-run vertical AS curve
– short-run vertical Phillips curve
![Page 83: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/83.jpg)
• Aggregate supply & the Phillips curve: when expectations are incorrect– the goods market
RATIONAL EXPECTATIONS AND THE PHILLIPS CURVE
![Page 84: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/84.jpg)
O
Pric
e le
vel
National output
AD1
SRAS1 (expected price level = P1)
P1
Qn
a
Q3
AD2
SRAS2
(expected price level = P2 )
P3
LRAS
P2
How a rise in aggregate demand could cause a rise in national output
AD3
b
![Page 85: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/85.jpg)
O
Pric
e le
vel
National output
AD1
SRAS1
(expected price level = P1)
P1
Qn
a
Q3
AD2
SRAS2
(expected price level = P2 )
P3
LRAS
P2
How a rise in aggregate demand could cause a fall in national output
AD3
c
![Page 86: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/86.jpg)
• Aggregate supply & the Phillips curve: when expectations are incorrect– the goods market– the labour market
RATIONAL EXPECTATIONS AND THE PHILLIPS CURVE
![Page 87: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/87.jpg)
ASL2 ((W / P )e > W / P )
O
Rea
l wag
e ra
te (W
/ P
)
Number of workers
ADL
Q1
Underpredictionof inflation
Q2
ASL1 ((W / P )e = W / P )
Effects in the labour market of an underprediction of inflation
![Page 88: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/88.jpg)
• Aggregate supply & the Phillips curve: when expectations are incorrect– the goods market– the labour market– implications for the Phillips curve
• Policy implications of rational expectations
• Real business cycles– persistent shifts in aggregate supply– turning points
RATIONAL EXPECTATIONS AND THE PHILLIPS CURVE
![Page 89: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/89.jpg)
O
Infla
tion
(%)
Unemployment (%)
P e = P
. .P
e > P. .
P e < P
. .
New classical version of short-run Phillips curves
![Page 90: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/90.jpg)
• Aggregate supply & the Phillips curve: when expectations are incorrect– the goods market– the labour market– implications for the Phillips curve
• Policy implications of rational expectations
RATIONAL EXPECTATIONS AND THE PHILLIPS CURVE
![Page 91: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/91.jpg)
• Aggregate supply & the Phillips curve: when expectations are incorrect– the goods market– the labour market– implications for the Phillips curve
• Policy implications of rational expectations
• Real business cycles
RATIONAL EXPECTATIONS AND THE PHILLIPS CURVE
![Page 92: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/92.jpg)
• Aggregate supply & the Phillips curve: when expectations are incorrect– the goods market– the labour market– implications for the Phillips curve
• Policy implications of rational expectations
• Real business cycles– persistent shifts in aggregate supply
RATIONAL EXPECTATIONS AND THE PHILLIPS CURVE
![Page 93: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/93.jpg)
• Aggregate supply & the Phillips curve: when expectations are incorrect– the goods market– the labour market– implications for the Phillips curve
• Policy implications of rational expectations
• Real business cycles– persistent shifts in aggregate supply– turning points
RATIONAL EXPECTATIONS AND THE PHILLIPS CURVE
![Page 94: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/94.jpg)
Modern Keynesian Views
Aggregate Supply, Unemployment and Inflation
![Page 95: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/95.jpg)
MODERN KEYNESIAN VIEWS
• Modern developments of the Keynesian model
• Growth in equilibrium unemployment– higher structural unemployment– hysteresis
• The persistence of demand-deficient unemployment– payment of efficiency wages– insider power
![Page 96: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/96.jpg)
MODERN KEYNESIAN VIEWS
• Incorporation of expectations
– expansion of aggregate demand
![Page 97: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/97.jpg)
O
Infla
tion
(%)
Unemployment (%)
U1
P1
.I
II
Z
U2
P2
.c
a
b
Keynesian analysis of reflationary policies
![Page 98: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/98.jpg)
MODERN KEYNESIAN VIEWS
• Incorporation of expectations
– expansion of aggregate demand
– contraction of aggregate demand
![Page 99: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/99.jpg)
O
Infla
tion
(%)
Unemployment (%)
I
U2
b
U1
a
Keynesian analysis of deflationary policies
![Page 100: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/100.jpg)
L
O
Infla
tion
(%)
Unemployment (%)
U1
Ia b
U2
c
Keynesian analysis of deflationary policies
![Page 101: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/101.jpg)
MODERN KEYNESIAN VIEWS
• Incorporation of expectations
– expansion of aggregate demand
– contraction of aggregate demand
• Keynesian criticisms ofnon-intervention
![Page 102: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/102.jpg)
Common Ground Among Economists?
Aggregate Supply, Unemployment and Inflation
![Page 103: 14. aggregate supply unemployment and inflation](https://reader031.fdocuments.in/reader031/viewer/2022020314/58eb3ab41a28ab710c8b4691/html5/thumbnails/103.jpg)
COMMON GROUND AMONG ECONOMISTS?
• Short-run effects of changes in aggregate demand
• Long-run effects of changes in aggregate demand
• Role of expectations
• Importance of supply-side factors