1. Aggregate Supply and the Transition to Policy
Chapter 14

2. Sources of Aggregate Supply Shifts
Along AS, factor prices are constant
Changes in factor prices shift AS
Change can be gradual
Wages slowly rising
Or can be sudden and dramatic
OPEC not selling oil to the U.S. in the 1970’s which caused huge increase in oil prices

3. Shift in AS
Shift

4. Variables Causing Shifts
Costs of production
Costs of materials, resources, capital
Wages (foreign and domestic)
Interest rates
External shocks
Weather (good or bad)
Wars
Natural disasters
Anything that causes factors of production to be more expensive will drive AS up

5. Shocks Shocks A sudden unavailability
May lead to rationing or bail-outs (forms of government intervention)
Encourages formation of black markets

6. Transition to Policy
We’ve developed a model using AS, AD, and LAS that allows us to represent the macroeconomy…
One of the basic macro questions was
Why is there unemployment?
AS shock up (decrease in AS)
AD shock left (decrease in AD)

7. AS Shift

8. AD Shift

9. Unemployment Why would unemployment persist?
Answer to this lies in the micro foundations of the macro economy
If the nice assumptions are realistic, then the macroeconomy will adjust back to full employment by itself
If the nice assumptions are not realistic due to market power, market failure, or slowly adjusting markets, then unemployment might be a persistent problem

10. Need for Policy?
This connection between micro and macro is crucial in understanding the debate over what, if any, policies should be used to influence the macroeconomy