Chapter 14. Aggregate Supply H.W. pp #3, 4, 7 macromodel as_ad_phillips_curve #1, 4, 8 Skip the appendix A couple of graphs from previous editions were omitted in the eighth edition. Link to syllabussyllabus

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

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

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

Figure 16.7 The Phillips Curve: Concept and empirical data McConnel/Brue textbook

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

Other text. Inflation rates and unemployment rates, Source: McConnel/Brue

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

Fig. 14-2, p. 405, compared to Fig.14-5, p Effects of increases in inflationary expectations. Low P E High P E 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 Effects of increases in inflationary expectations. Low P E High P E Remember: Rational Expectations Theory says expectations change quickly. Hysterisis is the name given to the idea that macro effects are long term. Long Run Phillips 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 spent most of his academic career. Nobel Prize in 1995, primarily for work 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, or anti-cyclical. Theory says they should be anti-cyclical, but the 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 Sixth edition The Sticky-Wage Model

Fig. 13-2, p Sixth Edition The Cyclical Behavior of the Real Wage