Chapter17Summary - Chapter 17 Summary Tucker,...

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Chapter 17 Summary Tucker , Macroeconomics for Today , 5 th Edn. 1. The AD-AS model implies that changes in AD will cause changes in the price level, changes in the level of real GDP, or both--depending on the shape of the AS schedule. IF the AS schedule does not shift as the AD schedule shifts over time, we predict that: A. If the AS schedule is vertical or horizontal, there will be no "trade-off" between the inflation rate and the unemployment rate. B. If the AS schedule is upward-sloping but not vertical, there will be a "trade-off" between inflation and the unemployment rate. 2. The "Phillips Curve" represents the actual yearly combinations of inflation and unemployment rates observed in an economy over a period of time. It is not a theoretical measure, but a plotting of the actual combinations of annual inflation rates and unemployment rates. 3. The Phillips Curve for the U.S. economy for the decade of the 1960s indicates a (negative) trade-off between inflation and unemployment. That is, as the unemployment rate was reduced (through increases in aggregate demand), the inflation rate increased, and vice versa. See the graph of these relationships in the lecture notes. A Phillips Curve of this shape could be generated by an AD schedule that was shifting (moving back and forth over the 10 year period) against a fixed (and up-ward sloping, but non-vertical) AS schedule. You should clarify in your thinking that an upward-sloping AS schedule is consistent with a downward-sloping Phillips curve. 4. The implication of a 1960's style Phillips curve is that such a schedule represents a "menu" of policy choices for those concerned with managing the U.S. economy. If the schedule is convex to the origin of the graph, each 1% reduction in the unemployment rate (a leftward movement up along the Phillips Curve) comes about at an ever-increasing cost in terms of a higher inflation rate. Such thinking produced a debate about what is the "best" combination of inflation and unemployment for the economy to experience, and what policy options (e.g., monetary and fiscal policy) should be used to achieve it. This was the direction of macroeconomic thinking during the decade of the 1960s, and early 1970s. 5.
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This note was uploaded on 04/02/2008 for the course ECN 211 taught by Professor Kingston during the Spring '08 term at ASU.

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Chapter17Summary - Chapter 17 Summary Tucker,...

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