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Chapter Twenty-Eight:
Aggregate Supply, Aggregate
Demand, and Inflation: Putting it
All Together
Aggregate Demand and Inflation
Output (Y )
Infl
atio
n r
ate
(π )
Aggregate Demand(AD)
If inflation rises…
…the level of Aggregate Demand falls
Y1
π1
π0
Y0
A
B
Figure 28.1: The Aggregate Demand Curve
Output (Y )
Infl
atio
n r
ate
(π )
AD0
AD1
Figure 28.2: The Effect of Expansionary Fiscal Policy or Increased Confidence on the AD Curve
Aggregate Demand and Inflation
Output (Y )
Infl
atio
n r
ate
(π )
Aggregate Supply (AS)
Maximum Capacity
Y*
Unemployment
Wage-Price Spiral
Figure 28.3: The Aggregate Supply Curve
Output (Y )
Infl
atio
n r
ate
(π )
AS0
AS15 % -
3 % -
Figure 28.4: The Effect of an Increase in Inflationary Expectations on the Aggregate Supply Curve
Output (Y )
Infl
atio
n r
ate
(π )
AS1
AS0
Expansion of Maximum Capacity
Figure 28.5: A Beneficial Supply Shock: Expansion of Output Capacity
Putting the AS/AD Model to Work
Output (Y )
Infl
atio
n r
ate
(π )
AS
Y*
AD
E0
Unemployment
Figure 28.6: The Aggregate Demand and Supply Equilibrium in Recession
Output (Y )
Infla
tion
rate
(π
) AS
Y*
AD1AD0
E1
E0
Unemployment
Figure 28.7: Expansionary Fiscal Policy in Response to a Recession
Output (Y )
Infla
tion
rate
(π
) AS
Y*
AD1
AD0
E1
E0
Unemployment
Figure 28.8: A Greater Expansion of Aggregate Demand
Output (Y )
Infla
tion
rate
(π
) AS
Y*
AD1
AD0
E1
E0
Wage-Price Spiral
Figure 28.9: Excessively High Aggregate Demand Causes Inflation
1963
19691968
1967
1966
19651964
Unemployment Rate (percent)
Infl
atio
n (
per
cen
t p
er y
ear)
Figure 28.10: The Phillips Curve in the 1960s
Output (Y )
Infla
tion
rate
(π
)
AS0
Y*
AD0
AD1
E0
E1AS1
Figure 28.11: Contractionary Fiscal Policy and Rising Inflationary Expectations
Output (Y )
Infla
tion
rate
(π
)
AS0
AS1
AD
E1
E0
Lower Capacity
Figure 28.12: The Effect of the Oil Price Shock of the 1970s
Output (Y )
Infla
tion
rate
(π
)
Y*
Unemployment
AD0
AD1
E0E1
AS1
AS0
Figure 28.13: The Effects of The Fed’s “Tight Money” Policies in the 1980s
0
Figure 28.14: Unemployment Trends 1960-2012 (Percentage of Labor Force)
Source: Bureau of Labor Statistics, http://bls.gov/cps/cpsaat01.pdf
Figure 28.15: Inflation Trends 1960-2012
Source: Bureau of Labor Statistics, ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
Output (Y )
Infla
tion
rate
(π
)
AS1
AS0
AS2
AD
E0
E2
E1
Higher Capacity
Figure 28.16: The Effects of Technological Innovation and Increased Efficiency
Competing Theories
Output (Y )
Infla
tion
rate
(π
) Classical AS
Y*
AD
Figure 28.17: The Classical View of AS/AD
Output (Y )
Infla
tion
rate
(π
)
Y*
AE1
AD0
E1
E0
Classical ASR
AS1
AS0
Figure 28.18: A New Classical View of Economic Fluctuations