321LecNote06Ch13

# 321LecNote06Ch13 - Instructor Kim H.H Fall 2009...

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Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 1 Chapter 13. Aggregate Supply and the Short-run Tradeoff Between Inflation and Unemployment 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 Introduction In previous chapters, we assumed the price level P was “_______” in the short run. This implies a ____________ SRAS curve. Now, we consider two prominent models of aggregate supply in the short run: ____________________ ________________________________ Introduction Both models imply: Other things equal, Y and P are positively related, so the SRAS curve is upward- sloping. The sticky-price model Reasons for sticky prices: ________________________________________________ a positive parameter actual price level expected price level agg. output natural rate of output

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Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 2 ________________________ firms not wishing to annoy customers with frequent price changes Assumption: Firms set their own prices. ( e.g. , as in monopolistic competition). The sticky-price model An individual firm’s desired price is: where a > 0. Suppose two types of firms: firms with flexible prices, set prices as above firms with sticky prices, must set their price before they know how P and Y will turn out: Assume sticky price firms expect that output will equal its natural rate. Then, To derive the aggregate supply curve, first find an expression for the overall price level. s = fraction of firms with sticky prices. Then, we can write the overall price level as… Subtract (1 s ) P from both sides:
Instructor : Kim, H.H. Intermediate Macro Analysis Fall 2009 Economics 01:220:321 3 Divide both sides by s : High EP High P If firms expect high prices, then firms that must set prices in advance will set them high. Other firms respond by setting high prices. High Y High P When income is high, the demand for goods is high. Firms with flexible prices set high prices. The greater the fraction of flexible price firms, the smaller is s and the bigger is the effect of Δ Y on P . Finally, derive AS equation by solving for Y : The imperfect-information model Assumptions: All wages and prices are perfectly flexible, all markets are clear.

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