Chapter13 - CHAPTER13 AggregateSupplyandtheShortrunTradeoff

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Chapter Thirteen 1 CHAPTER 13 Aggregate Supply and the Short-run Tradeoff Between Inflation and Unemployment ® A PowerPoint Tutorial To Accompany   MACROECONOMICS, 7th. Edition N. Gregory Mankiw Tutorial written by: Mannig J. Simidian B.A. in Economics with Distinction, Duke University  M.P.A., Harvard University Kennedy School of Government M.B.A., Massachusetts Institute of Technology (MIT) Sloan School of Management
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Chapter Thirteen 2 When we introduced the aggregate supply curve of Chapter 9, we established that aggregate supply behaves differently in the short run than in the long run . In the long run, prices are flexible, and the aggregate supply curve is vertical. When the aggregate supply curve is vertical, shifts in the aggregate demand curve affect the price level, but the output of the economy remains at its natural rate. By contrast, in the short run, prices are sticky, and the aggregate supply curve is not vertical. In this case, shifts in aggregate demand do cause fluctuations in output. In Chapter 9, we took a simplified view of price stickiness by drawing the short-run aggregate supply curve as a horizontal line, representing the extreme situation in which all prices are fixed. So, now we’ll refine our understanding of short-run aggregate supply to better reflect the real world in which some prices are sticky and others are not.
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Chapter Thirteen 3 After examining the basic theory of the short-run aggregate supply curve, we establish a key implication . We show that this curve implies a trade-off between two measures of economic performance inflation and unemployment . This trade-off, called the Phillips curve , tells us that to reduce the rate of inflation policymakers must temporarily raise unemployment, and to reduce unemployment, they must accept higher inflation. But, this tradeoff is policymakers face such a tradeoff in the short run and, why just as importantly, they do not face it in the long run. Inflation, π Unemployment, u only temporary. One goal of this module is to help explain how and why
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Chapter Thirteen 4 Let’s now look into a few prominent models of aggregate supply: Sticky-price , which is most widely accepted, and an alternative theory Imperfect-information . In all the models, some market imperfection causes the output of the economy to deviate from its natural level. As a result, the short-run aggregate supply curve is upward sloping , rather than vertical, and shifts in the aggregate demand curve cause the level of output to deviate temporarily from its natural level. These temporary deviations represent the booms and busts of the business cycle. Although these models takes us down a different theoretical route, each route ends up in the same place. That final destination is a short-run aggregate supply equation of the form…
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Chapter Thirteen 5 Y = Y + α (P-EP) where 0 Output Actual price level positive constant: an indicator of how much output responds to unexpected changes in the price level.
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Chapter13 - CHAPTER13 AggregateSupplyandtheShortrunTradeoff

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