Chapter 14. Aggregate Supply

H.W. pp. 420-21 #3, 4, 7 macromodel as_ad_phillips_curve #1, 4, 8 Skip the appendix

A couple of graphs from previous editionswere omitted in the eighth edition.

Link to syllabus

Fig. 14-1, p. 404. Short-Run Aggregate Supply Curve

Fig. 14-2, p. 405. Shifts in AD and Short Run Fluctuations

Fig. 14-4, p. 412. Short Run Tradeoff between Inflation and Unemployment

Figure 16.7 The Phillips Curve: Concept and empirical data

McConnel/Brue textbook

Fig. 14-3, p. 410. Inflation and Unemployment in the US

Fig. 14-5, p. 413. Shifts in the Short Run Tradeoff

Fig. 14-2, p. 405, compared to Fig.14-5, p. 413.Effects of increases in inflationary expectations.

Low PE

High PE

Remember: Rational Expectations Theory says expectations change quickly.Hysterisis is the name given to the idea that macro effects are long term.

Fig. 14-2, p. 405, compared to Fig.14-5, p. 413.Effects of increases in inflationary expectations.

Low PE

High PE

Remember: Rational Expectations Theory says expectations change quickly.

Hysterisis is the name given to the idea that macro effects are long term.

Long RunPhillips Curve

LRAS

B

A

C

After price expectations change,economy goes from B to C.

Table 14-1, p. 416

Review

Phillips curve: intro, useful to talk about tradeoff, worked in 1960s; interpreted as flip-side of AS

Movements along Phillips curve correspond to shifts of AD Monetary or fiscal policy

Shifts (up or down) of Phillips curve correspond to shifts of AS: Price of oil, wages ‘technology,’ weather, business taxes, gov’t regulation, etc. and Price (or inflationary) expectations affect AS [new idea]

Robert Lucas

Born 1937 in state of Washington

Parents were leftist, blue collar,working class.

Undergraduate major in history at U. of Chicago, where he has spentmost of his academic career.

Nobel Prize in 1995, primarily forwork in Rational Expectations.

Thomas Sargent

Born 1943 in Pasadena, California.B.A. at UC-Berkeley, Ph.D. Harvard, 1968

Nobel Prize, 2011 for his work in Rational Expectations (and related areas)

Taught at Penn, Minnesota, Stanford, and is now at NYU.

Describes himself as a Democrat, “a fiscally conservative, socially liberal Democrat,” adding, “I think that budget constraints are really central.” It’s important to consider the “incentive effects” of government policies, he continued. “There are trade-offs in efficiency and equality, and they lead to choices that aren’t easy,” he said. [NY Times]

Putting it all together (Chapter 14 appendix, p. 424)

Graphs omitted from the sixth edition

Fig. 13-1, p. 350 of older book.

Fig. 13-2, p. 352 of older book.

Discuss whether real wages should be pro-cyclical, oranti-cyclical. Theory says they should be anti-cyclical, butthe data seems to suggest they are pro-cyclical.

As an additional theoretical comment, it is the case that how closely foreign trade is considered is important in this discussion.

Fig. 13-1, p. 350.Sixth edition

The Sticky-Wage Model

Fig. 13-2, p. 352 . Sixth EditionThe Cyclical Behavior of the Real Wage