This preview shows pages 1–9. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: 1 CHAPTER 13 Aggregate Supply MACROECONOMICS C H A P T E R Aggregate Supply and the Shortrun Tradeoff Between Inflation and Unemployment 13 2 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: Stickyprice model Imperfectinformation model 3 CHAPTER 13 Aggregate Supply Introduction Both models imply: natural rate of output a positive parameter expected price level actual price level agg. output Other things equal, Y and P are positively related, so the SRAS curve is upwardsloping. ( ) Y Y P EP = + 4 CHAPTER 13 Aggregate Supply The stickyprice model Reasons for sticky prices: longterm contracts between firms and customers menu costs firms not wishing to annoy customers with frequent price changes Assumption: Firms set their own prices ( e.g. , as in monopolistic competition). 5 CHAPTER 13 Aggregate Supply The stickyprice model An individual firms 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: p P a Y Y = + ( ) p EP a EY EY = + ( ) 6 CHAPTER 13 Aggregate Supply The stickyprice model 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 p EP a EY EY = + ( ) = p EP 7 CHAPTER 13 Aggregate Supply The stickyprice model Subtract (1 s ) P from both sides: price set by flexible price firms price set by sticky price firms Divide both sides by s : 1 = + + [ ] ( )[ ( )] P s EP s P a Y Y 1 = + [ ] ( )[ ( )] sP s EP s a Y Y 1 = + ( ) ( ) s a P EP Y Y s 8 CHAPTER 13 Aggregate Supply The stickyprice model High EP High P If firms expect high prices, then firms that must set prices in advance will set them high....
View
Full
Document
This note was uploaded on 11/10/2011 for the course ECON 4610 taught by Professor Xiaohuang during the Fall '11 term at Kennesaw.
 Fall '11
 XiaoHuang
 Inflation

Click to edit the document details