Tutorial_CHAP13

Tutorial_CHAP13 - CHAPTER 13 ggregate Supply and the...

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Chapter Thirteen 1 ® CHAPTER 13 ggregate Supply and the Short-run Tradeo Between Inflation and Unemployment A PowerPoint Tutorial To Accompany MACROECONOMICS, 6th. ed. N. Gregory Mankiw By Mannig J. Simidian
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Chapter Thirteen 2 Let’s consider the decision of a single wheat producer, who earns income from selling wheat and uses this income to buy goods and services. The amount of wheat she chooses to produce depends on the price of wheat relative to the prices of other goods and services in the economy. If the relative price of wheat is high, she works hard and produces more wheat. If the relative price of wheat is low, she prefers to work less and produce less wheat. The problem is that when the farmer makes her production decision, she does not know the relative price of wheat. She knows the nominal price of wheat, but not the price of every other good in the economy. She estimates the relative price of wheat using her expectations of the overall price level.
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Chapter Thirteen 3 If there is a sudden increase in the price level, the farmer doesn’t know if it is a change in overall prices or just the price of wheat. Typically, she will assume that it is a relative price increase and will therefore increase the production of wheat. Most suppliers will tend to make this mistake. To sum up, the notion that output deviates from its natural level when the price level deviates from the expected price level is captured by: Y = Y + α (P - P e ), a > 0 Output Natural level of output Price level Expected price level
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Chapter Thirteen 4 When we introduced the aggregate supply curve of Chapter 9, we established that aggregate supply behaves differently in the short run than in the long run. In the long run, prices are flexible, and the aggregate supply curve is vertical. When the aggregate supply curve is vertical, shifts in the aggregate demand curve affect the price level, but the output of the economy remains at its natural rate. By contrast, in the short run, prices are sticky, and the aggregate supply curve is not vertical. In this case, shifts in aggregate demand do cause fluctuations in output. In Chapter 9, we took a simplified view of price stickiness by drawing the short-run aggregate supply curve as a horizontal line, representing the extreme situation in which all prices are fixed. So, now we’ll refine our understanding of short-run aggregate supply.
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Chapter Thirteen 5 After examining the models, we examine the implication of the short-run aggregate supply curve. We show that this curve implies a trade-off between two measures of economic performance inflation and unemployment . This trade-off, called the Phillips curve , tells us that to reduce the rate of inflation policymakers must temporarily raise unemployment, and to reduce unemployment, they must accept higher inflation.
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Chapter Thirteen 6 Let’s now examine three prominent models of aggregate supply: Sticky-price , Sticky-wage , and Imperfect-information .
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Tutorial_CHAP13 - CHAPTER 13 ggregate Supply and the...

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