ECN502 Chapter Notes -Aggregate Supply, Phillips Curve, Aggregate Demand
Document Summary
Chapter 16 - extending the analysis of aggregate supply. Recent focus on the long-run adjustments and economic outcomes has renewed debates about stabilization policy and causes of instability. This chapter makes the distinction between short run and long run aggregate supply. The extended model is then used to glean new insights on demand-pull and cost-push inflation. The relationship between inflation and unemployment is examined; we look at how expectations can affect the economy, and assess the effect of taxes on aggregate supply. For macroeconomics the short-run is a period in which nominal wages (and other input prices) remain fixed as the price level changes. Workers may not be fully aware of the change in their real wages due to inflation (or deflation) and thus have not adjusted their labor supply decisions and wage demands accordingly. Employees hired under fixed wage contracts must wait to renegotiate regardless of changes in the price level. Formed by long-run equilibrium points a1, b1, c1.
