16 - 1 copyright mcgraw-hill/irwin, 2005 short-run and long- run aggregate supply short-run...
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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
PreviousSlide
NextSlide
EndEndShowShow
Extending the Analysis ofAggregate Supply
16C H A P T E R
16 - 2Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
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 -
16 - 3Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
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
16 - 4Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
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
Real domestic output
SHORT-RUN AGGREGATE SUPPLY
P3 a3
Q2Q3
16 - 5Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
o
AS1
P1
P2
Qf
a2
a1
AS2
b1
ASLR
Pri
ce L
evel
Real domestic output
LONG-RUN AGGREGATE SUPPLYA higher price level results in higher nominal wages and thus shifts the short-run aggregate supply to the left .
16 - 6Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
o
P3
AS1
P1
P2
Qf
a2
a3
a1
AS2
b1
AS3
c1
ASLR
Pri
ce L
evel
Real domestic output
LONG-RUN AGGREGATE SUPPLYA lower price level results reduces nominal wages and shifts the short-run aggregate supply to the right .
16 - 7Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
EQUILIBRIUM IN THEEXTENDED AD-AS MODEL
o
P1
AS1
ASLR
AD1
a
Qf
Pri
ce L
evel
Real domestic output
16 - 8Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
DEMAND-PULL INFLATION
o
P1
AS1
ASLR
AD1
a
Qf
Pri
ce L
evel
Real domestic output
bP2
P3
AD2
AS2
c
Q1
16 - 9Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
Q2
COST-PUSH INFLATION
o
P1
AS1
ASLR
AD1
a
Qf
Pri
ce L
evel
Real domestic output
bP2
AS2
Occurs when short-run AS shifts left
16 - 10Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
Q2
COST-PUSH INFLATION
o
P1
AS1
ASLR
AD1
a
Qf
Pri
ce L
evel
Real domestic output
bP2
P3
AD2
AS2
Government response with increased AD
c
Evenhigherpricelevels
16 - 11Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
COST-PUSH INFLATION
o
P1
AS1
ASLR
AD1
a
Qf
Pri
ce L
evel
Real domestic output
bP2
AS2
If government allows a recession to occur
Q2
16 - 12Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
Q2
COST-PUSH INFLATION
o
P1
AS1
ASLR
AD1
a
Qf
Pri
ce L
evel
Real domestic output
bP2
AS2
If government allows a recession to occur
Nominal wages fall &AS returns
to its originallocation
16 - 13Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
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.
16 - 14Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
o
P0
Q0
AD0
AS
EFFECT OF CHANGES IN AGGREGATE DEMANDON REAL OUTPUT AND THE PRICE LEVEL
Pri
ce L
evel
Real domestic output
16 - 15Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
o
P0
P1
Q0 Q1
AD0 AD1
AS
EFFECT OF CHANGES IN AGGREGATE DEMANDON REAL OUTPUT AND THE PRICE LEVEL
Pri
ce L
evel
Real domestic output
16 - 16Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
o
P0
P1
P2
Q0 Q1 Q2
AD0 AD1 AD2
AS
EFFECT OF CHANGES IN AGGREGATE DEMANDON REAL OUTPUT AND THE PRICE LEVEL
Pri
ce L
evel
Real domestic output
16 - 17Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
o
P0
P1
P2
P3
Q0 Q1 Q2 Q3
AD0 AD1 AD2 AD3
AS
EFFECT OF CHANGES IN AGGREGATE DEMANDON REAL OUTPUT AND THE PRICE LEVEL
Pri
ce L
evel
Real domestic output
16 - 18Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
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
16 - 19Copyright 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
PreviousSlide
NextSlide
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
16 - 20Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
THE LONG-RUN PHILLIPS CURVE
Aggregate-Supply Shocks
Stagflation’s Demise
Short-Run Phillips Curve
Long-Run Vertical Phillips Curve
Disinflation
16 - 21Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
TAXATION AND AGGREGATE SUPPLY
Supply-Side Economics
Taxes and Incentives to Work
Incentives to Save and Invest
Laffer Curve
16 - 22Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
0
100
l
THE LAFFER CURVE
Tax revenue (dollars)
Tax
rat
e (p
erce
nt)
16 - 23Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
0
100
m
l
THE LAFFER CURVE
Tax revenue (dollars)
Tax
rat
e (p
erce
nt)
16 - 24Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
0
100
m
n
l
THE LAFFER CURVE
Tax revenue (dollars)
Tax
rat
e (p
erce
nt)
16 - 25Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
0
100
m m
n
l
THE LAFFER CURVE
Tax revenue (dollars)
Tax
rat
e (p
erce
nt)
MaximumTax
Revenue
16 - 26Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
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
16 - 28Copyright 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
PreviousSlide
NextSlide
EndEndShowShow
Up next...
Economic Growth
Chapter 17