16 - 1 Copyright McGraw-Hill/Irwin, 2005 Short-Run and Long- Run Aggregate Supply Short-Run Aggregate Supply Long-Run Aggregate Supply Equilibrium with

16 - 1Copyright McGraw-Hill/Irwin, 2005

Short-Run and Long-Run Aggregate Supply

Short-Run Aggregate Supply

Long-Run Aggregate Supply

Equilibrium with the Extended AD-AS Model

Demand-Pull Inflation

Cost-Push Inflation

The Phillips Curve

Taxation and Aggregate Supply

The Laffer Curve

Key Terms

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Extending the Analysis ofAggregate Supply

16C H A P T E R







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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SHORT-RUN AND LONG-RUNAGGREGATE SUPPLY

Period in which nominal wages (and other input prices) remainfixed as the price level increases or decreases

Short Run -

Period in which nominal wages are fully responsive to previous changes in the price level

Long Run -







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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o

AS1

P1

P2

Qf Q2

a1

a2

A higher price level increases profits and output moving the economy from a1 to a2.

Pri

ce L

evel

Real domestic output

SHORT-RUN AGGREGATE SUPPLY







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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o

AS1

P1

P2

Qf

a1

a2

A lower price level decreases profits and output moving the economy from a1 to a3 .

Pri

ce L

evel


SHORT-RUN AGGREGATE SUPPLY

P3 a3

Q2Q3







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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o

AS1

P1

P2

Qf

a2

a1

AS2

b1

ASLR

Pri

ce L

evel


LONG-RUN AGGREGATE SUPPLYA higher price level results in higher nominal wages and thus shifts the short-run aggregate supply to the left .







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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o

P3

AS1

P1

P2

Qf

a2

a3

a1

AS2

b1

AS3

c1

ASLR

Pri

ce L

evel


LONG-RUN AGGREGATE SUPPLYA lower price level results reduces nominal wages and shifts the short-run aggregate supply to the right .







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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EQUILIBRIUM IN THEEXTENDED AD-AS MODEL

o

P1

AS1

ASLR

AD1

a

Qf

Pri

ce L

evel








Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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DEMAND-PULL INFLATION

o

P1

AS1

ASLR

AD1

a

Qf

Pri

ce L

evel


bP2

P3

AD2

AS2

c

Q1







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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Q2

COST-PUSH INFLATION

o

P1

AS1

ASLR

AD1

a

Qf

Pri

ce L

evel


bP2

AS2

Occurs when short-run AS shifts left







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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Q2

COST-PUSH INFLATION

o

P1

AS1

ASLR

AD1

a

Qf

Pri

ce L

evel


bP2

P3

AD2

AS2

Government response with increased AD

c

Evenhigherpricelevels







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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COST-PUSH INFLATION

o

P1

AS1

ASLR

AD1

a

Qf

Pri

ce L

evel


bP2

AS2

If government allows a recession to occur

Q2







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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Q2

COST-PUSH INFLATION

o

P1

AS1

ASLR

AD1

a

Qf

Pri

ce L

evel


bP2

AS2

If government allows a recession to occur

Nominal wages fall &AS returns

to its originallocation







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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THE INFLATION-UNEMPLOYMENTRELATIONSHIP

• Normally, there is a short-run trade-off between the rate of inflation and the the rate of unemployment.

• Aggregate supply shocks can cause both higher rates of inflation and higher rates of unemployment.

• There is no significant trade-off over long periods of time.







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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o

P0

Q0

AD0

AS

EFFECT OF CHANGES IN AGGREGATE DEMANDON REAL OUTPUT AND THE PRICE LEVEL

Pri

ce L

evel








Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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o

P0

P1

Q0 Q1

AD0 AD1

AS


Pri

ce L

evel








Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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o

P0

P1

P2

Q0 Q1 Q2

AD0 AD1 AD2

AS


Pri

ce L

evel








Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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o

P0

P1

P2

P3

Q0 Q1 Q2 Q3

AD0 AD1 AD2 AD3

AS


Pri

ce L

evel








Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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An

nu

al r

ate

of in

flat

ion

(per

cen

t)

Unemployment rate (percent)

7

6

5

4

3

2

1

01 2 3 4 5 6 7

As inflation declines...

THE PHILLIPS CURVE CONCEPT

unemploymentincreases







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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EndEndShowShow 1997

15

10

5

01992 2002

U.K.

GLOBAL PERSPECTIVEThe Misery Index, Selected Nations 1992 - 2002

Source: Bureau of Labor Statistics

Canada

Italy

France

U.S.

Germany

Japan







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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THE LONG-RUN PHILLIPS CURVE

Aggregate-Supply Shocks

Stagflation’s Demise

Short-Run Phillips Curve

Long-Run Vertical Phillips Curve

Disinflation







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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TAXATION AND AGGREGATE SUPPLY

Supply-Side Economics

Taxes and Incentives to Work

Incentives to Save and Invest

Laffer Curve







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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0

100

l

THE LAFFER CURVE

Tax revenue (dollars)

Tax

rat

e (p

erce

nt)







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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0

100

m

l

THE LAFFER CURVE


Tax

rat

e (p

erce

nt)







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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0

100

m

n

l

THE LAFFER CURVE


Tax

rat

e (p

erce

nt)







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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0

100

m m

n

l

THE LAFFER CURVE


Tax

rat

e (p

erce

nt)

MaximumTax

Revenue







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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Criticisms of the Laffer Curve

Taxes, Incentives, and Time

Inflation or Higher Interest Rates

Position on the CurveRebuttal and Evaluation

short runlong runPhillips curvestagflationaggregate supply shockslong-run vertical Phillips curvedisinflationsupply-side economicsLaffer curve

ENDBACKCopyright McGraw-Hill/Irwin, 2005







Cost-Push Inflation

The Phillips Curve


The Laffer Curve

Key Terms

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Economic Growth

Chapter 17

Documents

16 - 1 Copyright McGraw-Hill/Irwin, 2005 Short-Run and Long- Run Aggregate Supply Short-Run Aggregate Supply Long-Run Aggregate Supply Equilibrium with