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Chapter 14. Aggregate Supply
H.W. pp. 420-21 #3, 4, 7
macromodel as_ad_phillips_curve #1, 4, 8
Skip the appendix
A couple of graphs from previous editions
were omitted in the eighth edition.
Link to syllabus
Fig. 14-1, p. 404. Short-Run Aggregate Supply Curve
Fig. 14-2, p. 405. Shifts in AD and Short Run Fluctuations
Fig. 14-4, p. 412. Short Run Tradeoff between
Inflation and Unemployment
Figure 16.7 The Phillips Curve:
Concept and empirical data
Fig. 14-3, p. 410. Inflation and
Unemployment in the US
Fig. 14-5, p. 413. Shifts in the Short Run Tradeoff
Fig. 14-2, p. 405, compared to Fig.14-5, p. 413.
Effects of increases in inflationary expectations.
High PE
Low PE
Remember: Rational Expectations Theory says expectations change quickly.
Hysterisis is the name given to the idea that macro effects are long term.
Fig. 14-2, p. 405, compared to Fig.14-5, p. 413.
Effects of increases in inflationary expectations.
LRAS
High PE
Long Run
Phillips Curve
Low PE
C
B
A
After price expectations change,
economy goes from B to C.
Remember: Rational Expectations Theory says expectations change quickly.
Hysterisis is the name given to the idea that macro effects are long term.
Table 14-1, p. 416
Review
Phillips curve: intro, useful to talk about tradeoff, worked in 1960s;
interpreted as flip-side of AS
Movements along Phillips curve correspond to shifts of AD
Monetary or fiscal policy
Shifts (up or down) of Phillips curve correspond to shifts of AS:
Price of oil, wages
‘technology,’ weather, business taxes, gov’t regulation, etc.
and
Price (or inflationary) expectations affect AS [new idea]
Robert Lucas
Born 1937 in state of Washington
Parents were leftist, blue collar,
working class.
Undergraduate major in history at
U. of Chicago, where he has spent
most of his academic career.
Nobel Prize in 1995, primarily for
work in Rational Expectations.
Thomas Sargent
Born 1943 in Pasadena, California.
B.A. at UC-Berkeley, Ph.D. Harvard, 1968
Nobel Prize, 2011 for his work in Rational
Expectations (and related areas)
Taught at Penn, Minnesota, Stanford, and is now at NYU.
Describes himself as a Democrat, “a fiscally conservative, socially
liberal Democrat,” adding, “I think that budget constraints are really
central.”
It’s important to consider the “incentive effects” of government
policies, he continued. “There are trade-offs in efficiency and equality,
and they lead to choices that aren’t easy,” he said. [NY Times]
Putting it all together (Chapter 14 appendix, p. 424)
Graphs omitted from the sixth edition
Fig. 13-1, p. 350 of older book.
Fig. 13-2, p. 352 of older book.
Discuss whether real wages should be pro-cyclical, or
anti-cyclical. Theory says they should be anti-cyclical, but
the data seems to suggest they are pro-cyclical.
As an additional theoretical comment, it is the case that how
closely foreign trade is considered is important in this discussion.
Fig. 13-1, p. 350.
Sixth edition
The Sticky-Wage
Model
Fig. 13-2, p. 352 . Sixth Edition
The Cyclical Behavior of the Real Wage