Aggregate Supply, Unemployment and Inflation

Aggregate Supply,
Unemployment
and Inflation
Aggregate Supply, Unemployment and Inflation
Aggregate Supply
AGGREGATE SUPPLY
Different views on the shape of the AS

curve
Contrasting views on the aggregate supply curve:
(a) Extreme Keynesian
AS
P
AS
AD
Y Y
AS
AD
AD
Y Y Y
(b) Extreme Monetarist / New Classical
AS
Y
AS
AD
Y
AS
P
AD
AD
Y
(c) Moderate view
AS
(c) Moderate view
AS
AD
Y
(c) Moderate view
AS
P
P
AD
AD
Y Y
AGGREGATE SUPPLY

curve
Short-run aggregate supply
AGGREGATE SUPPLY

curve
the microeconomic foundations
Short-run response of a profit-maximising firm
to a rise in demand
MC
P1
AR
Q Q
MR
to a rise in demand
MC
P1
AR
AR
Q MR Q
MR
to a rise in demand
MC
P2
P1
AR
AR
Q Q MR Q
MR
The short-run aggregate supply curve
AS
P
P
AD
AD
AD
Y Y Y
AGGREGATE SUPPLY

curve
Long-run aggregate supply
AGGREGATE SUPPLY

curve
the interdependence of firms
The long-run AS curve when firms are interdependent
AS AS
AS
c
b
AD
AD
AGGREGATE SUPPLY

curve
investment
Effect of investment on the long-run AS curve
AS
AD
Effect of investment on the long-run AS curve
AS
AS
b AS
d
a
AD
AD
AGGREGATE SUPPLY

curve
investment
expectations
AGGREGATE SUPPLY
LRAS: monetarist / new classical model

flexible real wage rates
The aggregate labour market: Monetarist / New Classical analysis
AS
N
W/P
a b
W
AD
Q
AS
N
W/P
a b
W
AD
Q
AS
N
W/P
a W
b
W W
W
AD
Q
AS
N
W/P
d−c.
a b
W c d
W W
AD
Q
AGGREGATE SUPPLY

no money illusion
AGGREGATE SUPPLY

no money illusion
natural level of unemployment
AS
N
W/P
a b
W
AD
Q
AGGREGATE SUPPLY

no money illusion
implications for shape of LRAS
LRAS: Keynesian models
AGGREGATE SUPPLY

no money illusion
wage and price rigidity
Keynesian analysis of the aggregate labour market: fall in ADL
AS
N
W/P
c a b
W
AD AD
Q Q
AGGREGATE SUPPLY

no money illusion
hysteresis
Keynesian analysis of the aggregate labour market: hysteresis
AS
N
W/P
c a b
W
ADAD
AD AD
Q Q
Keynesian analysis of the aggregate labour market: hysteresis
AS AS
N
d e
W
W/P
c a b
W
AS
AD AD
Q Q
AGGREGATE SUPPLY

no money illusion
hysteresis
expectations of output changes
AGGREGATE SUPPLY

no money illusion
hysteresis
expectations of output changes
long-run money illusion
AGGREGATE SUPPLY
AS, AD and inflation
demand-pull inflation
Demand-pull inflation
AS AS
d
P
P c
P b
P a
AD
AD
AD
AS AS
e
P
d
P
P c
P b
P a
AD
AD
AD
AD
AS
AS AS
P f
e
P
d
P
P c
P b
P a
AD
AD
AD
AD
AS
g AS AS
P
P f
e
P
d
P
P c
P b
P a AD
AD
AD
AD
AD
AGGREGATE SUPPLY
cost-push inflation
Cost-push inflation
AS
AS
AS
d
P
c
P
b
P a
P
AD
AD
Cost-push inflation
AS
AS
AS
AS
e
P
d
P
c
P
b
P a
P
AD
AD
AGGREGATE SUPPLY
cost-push inflation
what causes inflation in practice?

Expectations
Augmented Phillips
Curve
EXPECTATIONS AUGMENTED PHILLIPS
CURVE
Incorporating expectations into a Phillips
equation
Adaptive expectations
The accelerationist theory

attempting to reduce unemployment below
the ‘natural’ level
.
The accelerationist theory of inflation
P
a
. U
IP
.
The accelerationist theory of inflation
P
d
.
IV Pe
b c .
III Pe
.
a II Pe
. U
I Pe
CURVE
equation

the long-run Phillips curve

.
P The long-run Phillips curve
U
U
CURVE
equation

the long-run Phillips curve
effects of deflationary policies

.
The effects of deflation
P
J
k
.
X Pe
U
.
P
J
k
l
.
m X Pe
.
XI Pe
.
XII Pe
U
.
P
J
k
l
m
a
U
CURVE
How quickly can inflation be eliminated?
the ‘short, sharp shock’
the slow route
Explanations of stagflation
clockwise Phillips loops
. Clockwise Phillips loops
P
b
a
U U
P
f
e
b
a
U U
P
f
e
g
d
c
i
b J
a
U U
CURVE
the slow route
rightward shifts in the long-run Phillips curve
CURVE
the slow route
Policy implications of the model
CURVE
the slow route
Policy implications of the model
shifting the long-run Phillips curve
Phillips loops in the UK?
75
80
76
74 77
79
81
7 90
7
3 1 78 82
89
7
2
91 85
88 84
87 83
98 97 95
00 92 86
94
01 96
93
02 99
75
80
76
74 77
79
81
7 90
7
3 1 78 82
89
7
2
91 85
88 84
87 83
98 97 95
00 92 86
94
01 96
93
02 99
75
80
76
74 77
79
81
7 90
7
3 1 78 82
89
7
2
91 85
88 84
87 83
98 97 95
00 92 86
94
01 96
93
02 99
75
80
76
74 77
79
81
7 90
7
3 1 78 82
89
7
2
91 85
88 84
87 83
98 97 95
00 92 86
94
01 96
93
02 99
75
80
76
74 77
79
81
7 90
7
3 1 78 82
89
7
2
91 85
88 84
87 83
98 97 95
00 92 86
94
01 96
93
02 99
75
80
76
74 77
79
81
7 90
7
3 1 78 82
89
7
2
91 85
88 84
87 83
98 97 95
00 92 86
94
01 96
93
02 99
Rational Expectations
and the Phillips Curve
RATIONAL EXPECTATIONS AND THE
PHILLIPS CURVE
Assumptions
flexible wages and prices
rational expectations
Aggregate supply & the Phillips curve:

when expectations are correct
short-run vertical AS curve
The effects of an increase in aggregate demand
SRAS
P
(a) Adaptive
P b
expectations
P
a
AD
AD
Q Q
SRAS
P
SRAS
P
c
P
(a) Adaptive
P b
expectations
P
a
AD
AD
Q Q
LRAS
SRAS
P
SRAS
P
c
P
(a) Adaptive
P b
expectations
P
a
AD
AD
Q Q
SRAS
P
(b) Rational
expectations
P
a
AD
AD
Q
SRAS
P
SRAS
P
c
P
(b) Rational
expectations
P
a
AD
AD
Q
LRASSRAS
SRAS
P
SRAS
P
c
P
(b) Rational
expectations
P
a
AD
AD
Q
PHILLIPS CURVE
Assumptions
flexible wages and prices
rational expectations

when expectations are correct
short-run vertical AS curve
short-run vertical Phillips curve

PHILLIPS CURVE
when expectations are incorrect
the goods market
How a rise in aggregate demand could cause a rise in
national output
LRAS
SRAS
P
SRAS
b P
P
P
P
a
AD
AD
AD
Q Q
How a rise in aggregate demand could cause a fall in
national output
SRAS
LRAS P
SRAS
P
P
c
P
P
a
AD
AD
AD
Q Q
PHILLIPS CURVE
the goods market
the labour market
Effects in the labour market of an underprediction of inflation
ASW / P W / P
ASW / PW / P
W/
Underprediction
AD
Q Q
PHILLIPS CURVE
the goods market
the labour market
implications for the Phillips curve
Policy implications of rational
expectations
Real business cycles
persistent shifts in aggregate supply
turning points
New classical version of short-run Phillips curves
. . . . . .
P <P P =P P >P
PHILLIPS CURVE
the goods market
the labour market
expectations
PHILLIPS CURVE
the goods market
the labour market
expectations
PHILLIPS CURVE
the goods market
the labour market
expectations
PHILLIPS CURVE
the goods market
the labour market
expectations
turning points
Modern Keynesian
Views
MODERN KEYNESIAN VIEWS
Modern developments of the Keynesian

model
Growth in equilibrium unemployment
higher structural unemployment
hysteresis
The persistence of demand-deficient
unemployment
payment of efficiency wages
insider power
Incorporation of expectations
expansion of aggregate demand

Keynesian analysis of reflationary policies
.
P c
b Z
. II
a
P
I
U U
contraction of aggregate demand

Keynesian analysis of deflationary policies
a
b
I
U U
Keynesian analysis of deflationary policies
a
b
I
c
U U
contraction of aggregate demand
Keynesian criticisms of
non-intervention
Common Ground
Among Economists?
COMMON GROUND AMONG ECONOMISTS?
Short-run effects of changes in aggregate

demand
Long-run effects of changes in aggregate

demand
Role of expectations
Importance of supply-side factors

Aggregate Supply, Unemployment and Inflation

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Aggregate Supply,

Different views on the shape of the AS

Different views on the shape of the AS

Different views on the shape of the AS

Different views on the shape of the AS

Different views on the shape of the AS

Different views on the shape of the AS

Different views on the shape of the AS

LRAS: monetarist / new classical model

LRAS: monetarist / new classical model

LRAS: monetarist / new classical model

LRAS: monetarist / new classical model

LRAS: monetarist / new classical model

LRAS: monetarist / new classical model

LRAS: monetarist / new classical model

LRAS: monetarist / new classical model

AS, AD and inflation

AS, AD and inflation

AS, AD and inflation

what causes inflation in practice?

The accelerationist theory

The accelerationist theory

the long-run Phillips curve

The accelerationist theory

the long-run Phillips curve

effects of deflationary policies

Aggregate supply & the Phillips curve:

Aggregate supply & the Phillips curve:

short-run vertical Phillips curve

Modern developments of the Keynesian

expansion of aggregate demand

expansion of aggregate demand

contraction of aggregate demand

expansion of aggregate demand

contraction of aggregate demand

Short-run effects of changes in aggregate

Long-run effects of changes in aggregate

Importance of supply-side factors

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