Chapter 22 econ.docx - Chapter 22 Aggregate Demands and Supply Analysis Autonomous increases in C I G or Xn or a looser monetary policy not related to a

Chapter 22 econ.docx - Chapter 22 Aggregate Demands and...

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Chapter 22- Aggregate Demands and Supply Analysis Autonomous increases in C, I, G, or Xn or a looser monetary policy not related to a change in inflation shifts the curve to the right Phillips Curve the aggregate supply curves are based on the expectations augmented Phillips Curve: inflation = pi e + w(U-Un) The starting point is Un: the “natural” unemployment This natural rate of unemployment is due to the severe heterogeneity of jobs and workers and may be divided into frictional and structural components The unemployment rate, Y, will be greater than the natural rate, Un, when the real wage is too high and less than Un when the real wage is too low relative to that equilibrium value Wages will rise faster when the labor market is tight and U < Un or expected inflation is high o When wages rise faster, costs rises faster and inflation is higher o The aggregate supply curve combines the Phillips curve with the inverse relationship betweem unemployment and output. For a given capital stock and technology, output will depends on the amount of labor employed Long Run Aggregate Supply Curve based on inflation = pi e + y (Y-Y p ), based on the question “what output would be produced at various inflation rates if that rate were sustained and came to be expected ( pi = pi e ) Regardless of the value for inflation, Y will equal Y p (hence a vertical curve in inflation, Y space) Short Run Aggregate Supply Curve based on inflation = pi e + y (Y-Y p ), given the inflation expected for the future, what output will be produced at different levels of current inflation? Given pi e , the greater inflation is, the greater Y will be – hence an

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