321LecNote06Ch13

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

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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:
Image of page 2
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.
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern