Chapter13 - CHAPTER13 AggregateSupplyandtheShortrunTradeoff

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

View Full Document Right Arrow Icon
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
Background image of page 1

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

View Full DocumentRight Arrow Icon
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. 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.
Background image of page 2
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.
Background image of page 3

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

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

This note was uploaded on 12/04/2011 for the course ECON 305 taught by Professor Neri during the Spring '11 term at American.

Page1 / 22

Chapter13 - CHAPTER13 AggregateSupplyandtheShortrunTradeoff

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online