Lecture16+-+The+Phillips+Curve+and+Aggregate+Supply

Lecture 16 phillips curve aggregate supply r j

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Unformatted text preview: ! = 1 and the short-run Phillips curve becomes vertical and identical to the long-run Phillips curve. Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 18/ 36 The Phillips Curve The modern Phillips curve with adaptive expectations The extension to include inflationary expectations: In the simplest version, we assume that inflation expectations are adaptive (or backward-looking): e ⇡t = ⇡t 1 and write the short-run Phillips curve ⇡ = ⇡e ! (U UN ) + ⇢ as ⇡t = ⇡t 1 ! ( Ut Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins UN ) + ⇢t Econ 100B: Macroeconomics 19/ 36 The Phillips Curve The modern Phillips curve with adaptive expectations The extension to include inflationary expectations: ⇡t = ⇡t 1 ! ( Ut UN ) + ⇢t Advantages: A very convenient analytical form. Provides reasons for sticky prices. 1 Slow changes in inflation expectations. 2 Some wage & price contracts may depend on past inflation. Disadvantage: A very simple (mechanistic?) view of how inflation expectations are formed. Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 20/ 36 The Phillips Curve The modern Phillips curve with adaptive expectations The accelerationist Phillips curve: Our Phillips curve ⇡t = ⇡t 1 ! ( Ut UN ) + ⇢t written as ⇡t = ! ( Ut UN ) + ⇢t is referred to as the accelerationist Phillips curve. Inflation is a rate, so the time-change of inflation is an acceleration. If Ut < UN then ⇡t > 0 if ⇢t = 0. If Ut = UN then ⇡t = 0 if ⇢t = 0. Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 21/ 36 The Phillips Curve The Phillips curve and aggregate supply: The Phillips curve is the basis for deriving the aggregate supply curve. Because there are both long-run and short-run Phillips curves, there are both long-run and short-run aggregate supply curves. Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 22/ 36 The Aggregate Supply Curve Definition: The aggregate supply curve represents the positive relationship between: the quantity of output that businesses are willing to produce, and the inflation rate. Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 23/ 36 The Aggreg...
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