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1、CHAPTER THIRTEEN Aggregate Supply,slide 1,Learning objectives,three models of aggregate supply in which output depends positively on the price level in the short run the short-run tradeoff between inflation and unemployment known as the Phillips curve,slide 2,Three models of aggregate supply,The sti
2、cky-wage model The imperfect-information model The sticky-price model All three models imply:,slide 3,The sticky-wage model,Assumes that firms and workers negotiate contracts and fix the nominal wage before they know what the price level will turn out to be. The nominal wage, W, they set is the prod
3、uct of a target real wage, , and the expected price level:,slide 4,The sticky-wage model,If it turns out that,then,unemployment and output are at their natural rates,Real wage is less than its target, so firms hire more workers and output rises above its natural rate,Real wage exceeds its target, so
4、 firms hire fewer workers and output falls below its natural rate,slide 5,slide 6,The sticky-wage model,Implies that the real wage should be counter-cyclical , it should move in the opposite direction as output over the course of business cycles: In booms, when P typically rises, the real wage shoul
5、d fall. In recessions, when P typically falls, the real wage should rise. This prediction does not come true in the real world:,slide 7,The cyclical behavior of the real wage,Percentage,change in real,wage,Percentage change in real GDP,1982,1975,1993,1992,1960,1996,1999,1997,1998,1979,1970,1980,1991
6、,1974,1990,1984,2000,1972,1965,-3,-2,-1,0,1,2,3,7,8,6,5,4,4,3,2,1,0,-1,-2,-3,-4,-5,slide 8,The imperfect-information model,Assumptions: all wages and prices perfectly flexible, all markets clear each supplier produces one good, consumes many goods each supplier knows the nominal price of the good sh
7、e produces, but does not know the overall price level,slide 9,The imperfect-information model,Supply of each good depends on its relative price: the nominal price of the good divided by the overall price level. Supplier doesnt know price level at the time she makes her production decision, so uses t
8、he expected price level, P e. Suppose P rises but P e does not. Then supplier thinks her relative price has risen, so she produces more. With many producers thinking this way, Y will rise whenever P rises above P e.,slide 10,The sticky-price model,Reasons for sticky prices: long-term contracts betwe
9、en firms and customers menu costs firms do not wish to annoy customers with frequent price changes Assumption: Firms set their own prices (e.g. as in monopolistic competition),slide 11,The sticky-price model,An individual firms desired price is,where a 0. Suppose two types of firms: firms with flexi
10、ble prices, set prices as above firms with sticky prices, must set their price before they know how P and Y will turn out:,slide 12,The sticky-price model,Assume firms w/ sticky prices expect that output will equal its natural rate. Then,To derive the aggregate supply curve, we first find an express
11、ion for the overall price level. Let s denote the fraction of firms with sticky prices. Then, we can write the overall price level as,slide 13,The sticky-price model,Subtract (1s )P from both sides:,Divide both sides by s :,slide 14,The sticky-price model,High P e High P If firms expect high prices,
12、 then firms who must set prices in advance will set them high. Other firms respond by setting high prices. High Y High P When income is high, the demand for goods is high. Firms with flexible prices set high prices. The greater the fraction of flexible price firms, the smaller is s and the bigger is
13、 the effect of Y on P.,slide 15,The sticky-price model,Finally, derive AS equation by solving for Y :,slide 16,The sticky-price model,In contrast to the sticky-wage model, the sticky-price model implies a procyclical real wage: Suppose aggregate output/income falls. Then, Firms see a fall in demand
14、for their products. Firms with sticky prices reduce production, and hence reduce their demand for labor. The leftward shift in labor demand causes the real wage to fall.,slide 17,Summary & implications,Each of the three models of agg. supply imply the relationship summarized by the SRAS curve & equa
15、tion,slide 18,Summary & implications,Suppose a positive AD shock moves output above its natural rate and P above the level people had expected.,Over time, P e rises, SRAS shifts up, and output returns to its natural rate.,slide 19,Inflation, Unemployment, and the Phillips Curve,The Phillips curve st
16、ates that depends on expected inflation, e cyclical unemployment: the deviation of the actual rate of unemployment from the natural rate supply shocks, ,where 0 is an exogenous constant.,slide 20,Deriving the Phillips Curve from SRAS,slide 21,The Phillips Curve and SRAS,SRAS curve: output is related to unexpected movements in the price level Phillips curve: unemployment is related to unexpected mov
