Lecture 12-The AS-AD model.pdf

Lecture 12-The AS-AD model.pdf - 30-Jan-18 MACROECONOMICS...

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30-Jan-18 1 MACROECONOMICS LECTURE 12 THE AS-AD MODEL CONTENTS OF THE LECTURE 1. Output determination and time horizon 2. Deriving the AS curve 3. Deriving the AD curve 4. Putting the AS and AD curve together CONTENTS OF THE LECTURE 1. Output determination and time horizon 2. Deriving the AS curve 3. Deriving the AD curve 4. Putting the AS and AD curve together
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30-Jan-18 2 1. OUTPUT DETERMINATION AND TIME HORIZON In the Neoclassical-Keynesian Synthesis (and New Keynesian economics ) a distinction is made between the way that output is determined in the short run, the medium run and the long run. Short run : Output is determined via the IS-LM model. Inflation plays no role. Medium run : Inflation affects output via the AS (Aggregate Supply)-AD (Aggregate Demand) model. Long run : Output is determined via the Solow growth model. 4 CONTENTS OF THE LECTURE 1. Output determination and time horizon 2. Deriving the AS curve 3. Deriving the AD curve 4. Putting the AS and AD curve together 2. DERIVING THE AS CURVE The AS curve is very similar to the Phillips curve. The difference is that the AS curve shows a relationship between the price level and output while the Phillips curve shows a relationship between inflation and unemployment . Consider the price setting discussed in the previous lecture: In order to derive a relationship between the price level and output, we need to replace the unemployment rate ( u ) with output.
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