Chapter 16 Lecture Notes

Chapter 16 Lecture Notes - CHAPTER SIXTEEN EXTENDING THE...

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CHAPTER SIXTEEN EXTENDING THE ANALYSIS OF AGGREGATE SUPPLY INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Explain the difference between the short-run and long-run aggregate supply curves and their significance for economic policy. 2. Distinguish between demand-pull and cost-push inflation using the aggregate demand-aggregate supply model. 3. Explain and construct a traditional Phillips Curve using the aggregate demand-aggregate supply model. 4. Illustrate the stabilization policy dilemma with the use of the Phillips Curve. 5. Enumerate the six supply-side shocks to the U.S. economy in the 1970s and 1980s. 6. Use an aggregate demand-aggregate supply graph to show how supply-side shocks led to stagflation in the 1970s and 1980s. 7. Explain why demand-management policies cannot eliminate stagflation. 8. Explain and state the significance of the natural rate hypothesis. 9. Distinguish between adaptive expectations and rational expectations theories and explain why they are considered two variants of the natural rate thesis. 10. Distinguish between demand-pull and cost-push inflation using the aggregate demand-aggregate supply model. 11. Explain the difference between the short-run and long-run aggregate supply curves and their significance for economic policy. 12. Identify two types of employment and training policies to combat stagflation. 13. Distinguish between wage-price guideposts and wage-price controls. 14. Explain what the advocates of supply-side economics consider as the basic causes of stagflation. LECTURE NOTES I. Introduction A. There has been new, controversial thinking about aggregate supply in the short run and long run. B. There has been renewed debate on whether the economy is “self correcting” and the effectiveness of fiscal and monetary policy. C. The AD-AS model has been extended, making the distinction between short run and long run aggregate supply. D. The model is then used to glean new insights on demand-pull and cost-push inflation. E. The relationship between inflation and unemployment is examined and we look at how expectations can affect the economy. 205
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Extending the Analysis of Aggregate Supply F. Finally, the tenets of supply side economics are evaluated. II. Short-Run and Long-Run Aggregate Supply A. Definition: Short-run and long-run. 1. For Macroeconomics the short-run is a period in which nominal wages (and other input prices) remain fixed as the price level changes. a. Workers may not be fully aware of the change in their real wages due to inflation (or deflation) and thus have not adjusted their labor supply decisions and wage demands accordingly. b. Employees hired under fixed wage contracts must wait to renegotiate regardless of changes in the price level. B.
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Chapter 16 Lecture Notes - CHAPTER SIXTEEN EXTENDING THE...

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