35 Extending the Analysis of Aggregate Supply McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

35Extending the Analysis of Aggregate

Supply

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Economics 12/8/14 http://mrmilewski.com

• OBJECTIVE: Examine Credit Cards. APMacro-I.B• Language objective: Write about credit cards.

• I. Administrative Stuff• II. Film: Frontline Credit Card Secrets

-questions on film• Homework: Begin reading Chapter#35

Economics 12/9/14 http://mrmilewski.com

• OBJECTIVE: Begin examination of aggregate supply. APMacro-I.B

• Language objective: Write about aggregate supply.

• I. ACDC Video• II. Journal#40

-notes on aggregate supply• Homework: Continue reading Chapter#33 &

questions on learnsmart

From Short Run to Long Run

• Short run• Input prices inflexible•Upsloping aggregate supply

• Long run• Input prices fully flexible•Vertical aggregate supply

• The transition?

LO1 35-4

From Short Run to Long Run

• Production above potential output:•High demand for inputs• Input prices rise•Short run aggregate supply shifts

left•Return to potential output

• Production below potential output• Graphical examples…

LO1 35-5

From Short Run to Long Run

P3

P1

P2

P3

P1

P2

Real Domestic Output Real Domestic Output

Qf

Short-RunAggregate Supply

Long-RunAggregate Supply

a1

a2

a3

b1

c1

Pri

ce L

evel

Pri

ce L

evel

AS3

AS2 AS1ASLR

Qf Q2Q3

AS1

a1

a2

a3

LO1 35-6

From Short Run to Long Run

Real Domestic Output

Long Run EquilibriumP

rice

Lev

el

P1

Qf

a

AS1ASLR

AD1

LO1 35-7

Extended AD-AS Model

Real Domestic Output

Demand-Pull Inflation P

rice

Lev

el

P1

Qf

a

AS1ASLR

AD1

AD2

AS2

c

bP2

P3

Q2

LO2 35-8

Extended AD-AS Model

Real Domestic Output

Cost-Push Inflation P

rice

Lev

el

P1

Qf

a

AS1ASLR

AD1

AD2

AS2

b

c

P2

P3

Q2

LO2 35-9

Extended AD-AS Model

Real Domestic Output

RecessionP

rice

Lev

el P1

Qf

a

AS1ASLR

AD1

AD2

AS2

b

c

P2

P3

Q1

LO2 35-10

Economics 12/10/14 http://mrmilewski.com

• OBJECTIVE: Continue examination of aggregate supply. APMacro-I.B

• Language objective: Write about aggregate supply.

• I. ACDC Film• II. Journal#41

-notes on aggregate supply• Homework: Finish reading Chapter#35 & finish

questions on learnsmart

Extended AD-AS Model

• Explaining ongoing inflation•Ongoing economic growth shifts

aggregate supply •Ongoing increases in money supply

shift aggregate demand • Small positive rate of inflation

LO2 35-12

Pri

ce

Le

ve

lReal GDP

Ca

pit

al

Go

od

s

Consumer Goods

Economic Growth, Ongoing Inflation

Productions Possibilities

Long Run Aggregate Supply

Increase in production possibilities

Increase in long-run aggregate supply

LO2 35-13

P1

P2

Q2Q10

Pri

ce l

evel

Real GDP

ASLR1 ASLR2

AS1

AS2

AD1

AD2

U.S. Growth

LO2 35-14

Economics 12/11/14 http://mrmilewski.com

• OBJECTIVE: Finish examination of aggregate supply. APMacro-I.B

• Language objective: Write about aggregate supply.

• I. ACDC Econ video• II. Journal#42

-notes on interest rates & the Fed• Homework: Chapter#35 questions 1-5 in

textbook

Inflation and Unemployment

• Low inflation and unemployment•Fed’s major goals•Compatible or conflicting?

• Short-run tradeoff• Supply shocks cause both rates to

rise• No long-run tradeoff

LO3 35-16

The Phillips Curve

Real Domestic Output

Pri

ce L

evel

0

P0

P1

P2

P3

Q0 Q1 Q2 Q3

AD0

AD1

AD2

AD3

AS

LO3 35-17

0

1

2

3

4

5

6

7

0 1 2 3 4 5 6 7

Unemployment Rate (Percent)

An

nu

al

Ra

te o

f In

fla

tio

n (

Pe

rce

nt)

0

1

2

3

4

5

6

7

0 1 2 3 4 5 6 7An

nu

al

Ra

te o

f In

fla

tio

n (

Pe

rce

nt)

Unemployment Rate (Percent)

• Demonstrates short-run tradeoff between inflation and unemployment

69

68

6766

65

64

6362

61

Concept Empirical DataData for the 1960s

The Phillips Curve

LO3 35-18

• 1960s economists believed in stable, predictable tradeoff

• Phillips curve shifts over time• Adverse supply shocks 1970s

•OPEC oil price shock•Stagflation

• Stagflation’s demise 1980s

The Phillips Curve

LO3 35-19

The Phillips Curve

• No long-run tradeoff between inflation and unemployment

• Short-run Phillips curve

•Role of expected inflation

• Long-run vertical Phillips curve

• Disinflation

LO4 35-20

The Phillips Curve

LO4

14

13

12

11

10

9

8

7

6

5

4

3

2

1An

nu

al r

ate

of

infl

atio

n (

per

cen

t)

Unemployment rate (percent)

35-21

The Phillips Curve

The Misery Index, Selected Nations, 1999-2009

15

10

5

1999 2001 2003 2005 2007 2009Source: Bureau of Labor Statistics,stats.bls.gov

LO4 35-22

The Long-Run Phillips Curve

3 4 5 60

3

6

9

12

15A

nn

ual

Rat

e o

f In

flat

ion

(P

erce

nt)

Unemployment Rate (Percent)

PCLR

PC3

PC2

PC1

a1

b1

a2

a3

b2

b3

c3

c2

LO4 35-23

Taxes and Aggregate Supply

• Supply-side economics• Tax incentives to work• Tax incentives to save and invest• The Laffer curve

Tax

Rat

e (P

erce

nt)

Tax Revenue (Dollars)

100

m

0

n

l

m

Laffer Curve

MaximumTax Revenue

LO5 35-24

Taxes and Aggregate Supply

• Criticisms of the Laffer curve•Taxes, incentives, and time• Inflation and higher real interest

rates•Position on the curve

• Rebuttal and evaluation

LO5 35-25

Taxes and Real GDP

• New findings suggest tax increases reduce real GDP (Romer and Romer, 2008)

• Positive output shocks raise tax revenues

• Difficult to separate the effects of tax changes from other effects

• Investment falls sharply in response to tax changes

LO5 35-26

Economics 12/12/14 http://mrmilewski.com

• OBJECTIVE: Finish examination of aggregate supply. APMacro-I.B

• Language objective: Write about aggregate supply.

• I. Administrative Stuff• II. Review Homework

-review questions on aggregate supply• Homework: Finish reading Ch#35 if you haven’t

already• NOTICE: Ch#33&35 Test on Wednesday Dec 17th