Ch_13 - University of Waterloo Department of Economics...

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1 CHAPTER 13 Aggregate Supply Lecture Note-Chapter 13 Aggregate Supply and the  Short Run Tradeoff Between  Inflation and Unemployment  University of Waterloo Department of Economics Spring 2010
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In this chapter, you will learn: In this chapter, you will learn: two models of aggregate supply in which output depends positively on the price level in the short run. about the short-run tradeoff between inflation and unemployment known as the Phillips curve. Not included-The Stick wage theory (pg 412-414).
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3 CHAPTER 13 Aggregate Supply  Introduction Most economists analyze short run fluctuations in national income and the price level using the model of AD and AS. In chapters 10-13, we examined the AD in some detail. The IS-LM model along with the M-F model shows how changes in fiscal and monetary policy and shocks to the money and goods markets shift the AD curve.
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4 CHAPTER 13 Aggregate Supply  Introduction In chapter 13, we focus on AS and develop theories that explain the position and slope of the AS curve. After examining the basic theory of the AS curve, we use the curve to establish the tradeoff between inflation and unemployment in the short run. This tradeoff is called the Phillips curve.
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5 CHAPTER 13 Aggregate Supply Introduction In previous chapters, we assumed the price level P was “stuck” in the short run. This implies a horizontal SRAS curve. Now, we consider two prominent models of aggregate supply in the short run: Sticky-price model Imperfect-information model
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6 CHAPTER 13 Aggregate Supply  Introduction 1. The imperfect-information model 2. The sticky-price model Both models imply: ( ) e Y Y P P = + - α natural rate of output a positive parameter the expected price level the actual price level agg. output
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7 CHAPTER 13 Aggregate Supply  Introduction Other things equal, Y and P are positively related, so the SRAS curve is upward-sloping. α is some number greater than zero and P e represents some expectation of the price level. This equation says that output may differ from its long-run natural rate if the actual price level turns out to be different from the price level that people anticipate.
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8 CHAPTER 13 Aggregate Supply  Introduction Note three implications of this equation. First, the aggregate supply curve slopes upward. Second, the position of the aggregate supply curve depends upon P e : the SRAS curve intersects the LRAS curve at a price level equal to P e , so a higher value of P e shifts the aggregate supply curve upward.
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9 CHAPTER 13 Aggregate Supply  Introduction Third, the parameter α measures how much differences between actual and expected prices influence output. If α = 0, the aggregate supply curve is vertical; if α becomes very large, the SRAS curve is almost horizontal, as in our earlier analysis.
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10 CHAPTER 13 Aggregate Supply  The sticky-price model Assume that firms have some monopolistic control over the prices they charge.
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11 CHAPTER 13 Aggregate Supply
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