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Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

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Page 1: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Chapter Twenty-Eight:

Aggregate Supply, Aggregate

Demand, and Inflation: Putting it

All Together

Page 2: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Aggregate Demand and Inflation

Page 3: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

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

Page 4: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

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

Page 5: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Aggregate Demand and Inflation

Page 6: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

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

Page 7: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

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

Page 8: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

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

Page 9: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Putting the AS/AD Model to Work

Page 10: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Output (Y )

Infl

atio

n r

ate

(π )

AS

Y*

AD

E0

Unemployment

Figure 28.6: The Aggregate Demand and Supply Equilibrium in Recession

Page 11: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Output (Y )

Infla

tion

rate

) AS

Y*

AD1AD0

E1

E0

Unemployment

Figure 28.7: Expansionary Fiscal Policy in Response to a Recession

Page 12: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Output (Y )

Infla

tion

rate

) AS

Y*

AD1

AD0

E1

E0

Unemployment

Figure 28.8: A Greater Expansion of Aggregate Demand

Page 13: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Output (Y )

Infla

tion

rate

) AS

Y*

AD1

AD0

E1

E0

Wage-Price Spiral

Figure 28.9: Excessively High Aggregate Demand Causes Inflation

Page 14: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

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

Page 15: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Output (Y )

Infla

tion

rate

)

AS0

Y*

AD0

AD1

E0

E1AS1

Figure 28.11: Contractionary Fiscal Policy and Rising Inflationary Expectations

Page 16: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Output (Y )

Infla

tion

rate

)

AS0

AS1

AD

E1

E0

Lower Capacity

Figure 28.12: The Effect of the Oil Price Shock of the 1970s

Page 17: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Output (Y )

Infla

tion

rate

)

Y*

Unemployment

AD0

AD1

E0E1

AS1

AS0

Figure 28.13: The Effects of The Fed’s “Tight Money” Policies in the 1980s

Page 18: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

0

Figure 28.14: Unemployment Trends 1960-2012 (Percentage of Labor Force)

Source: Bureau of Labor Statistics, http://bls.gov/cps/cpsaat01.pdf

Page 19: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Figure 28.15: Inflation Trends 1960-2012

Source: Bureau of Labor Statistics, ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

Page 20: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Output (Y )

Infla

tion

rate

)

AS1

AS0

AS2

AD

E0

E2

E1

Higher Capacity

Figure 28.16: The Effects of Technological Innovation and Increased Efficiency

Page 21: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Competing Theories

Page 22: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Output (Y )

Infla

tion

rate

) Classical AS

Y*

AD

Figure 28.17: The Classical View of AS/AD

Page 23: Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

Output (Y )

Infla

tion

rate

)

Y*

AE1

AD0

E1

E0

Classical ASR

AS1

AS0

Figure 28.18: A New Classical View of Economic Fluctuations