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

The level of aggregate output supplied at the natural

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Unformatted text preview: ate Supply Curve Long-Run Aggregate Supply The long-run aggregate supply curve, LRAS, depends upon: the amount of labor, L, the amount of capital, K , and the total factor productivity, A. The level of aggregate output supplied at the natural rate of unemployment is referred to as: the natural rate of output, or as potential output, Y p . Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 24/ 36 The Aggregate Supply Curve Short-Run Aggregate Supply The short-run aggregate supply curve, SRAS, is derived from the short-run Phillips curve by replacing: the unemployment gap, U the output gap, Y UN , with Y P. And to justify that empirically we need Okun’s Law. Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 25/ 36 Okun’s Law Casual empiricism of the relationship between GDP and unemployment. 20 2.0 ∆ Unemployment GDP Growth Rate 1.5 10 1.0 5 0.5 0 0.0 -5 -0.5 -10 -1.0 -15 -1.5 60 70 80 90 00 10 Source: FRED / BEA, BLS TIME (year) Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 26/ 36 ∆ UNEMPLOYMENT (%) GDP GROWTH RATE (%) 15 Okun’s Law Gap Version: (Ut UN ) ⇡ 0 .5 Y t YP Y P courtesy of the IMF 4 UNEMPLOYMENT GAP (%) 3 2 1 0 -1 -2 -3 -4 -6 -4 Source: FRED / BEA, BLS -2 0 2 4 6 GDP GAP (%/year) Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 27/ 36 The Short-Run Aggregate Supply Curve Derivation Given the modern Phillips curve ⇡t = ⇡t ! ( Ut 1 UN ) + ⇢t and Okun’s law ( Ut UN ) = ⇣ 0.5 Yt via substitution we get ⇡t = ⇡t 1 Y P ⌘ ⇣ + 0. 5 ! Y t ⌘ Y P + ⇢t or the short-run aggregate-supply curve: ⇣ ⌘ ⇡t = ⇡t 1 + Yt Y P + ⇢t Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 28/ 36 The Aggregate Supply Curve LRAS from the SRAS The short-run aggregate-supply curve ⇡t = ⇡t or ⇡t becomes, as ⇡t 1 ⇢t 1 ⇣ = Yt + ⇣ YP Yt ⌘ ⌘ Y P + ⇢t ! 1 (i.e. complete wage & price flexibility), Yt = Y P which is the long-run aggregate supply curve. Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins...
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This note was uploaded on 09/08/2013 for the course ECON 100B taught by Professor Wood during the Summer '08 term at University of California, Berkeley.

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