Short-Run and LongRun Aggregate Supply
Short-Run Aggregate
Supply
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
16
C HAPTE R
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Key Terms
Previous
Slide
End
Show
16 - 1
Next
Slide
Extending the Analysis of
Aggregate Supply
Copyright McGraw-Hill/Irwin, 2002
Short-Run and LongRun Aggregate Supply
Short-Run Aggregate
Supply
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Key Terms
Previous
Slide
End
Show
16 - 2
Next
Slide
SHORT-RUN AND LONG-RUN
AGGREGATE SUPPLY
Short Run Period in which nominal wages
(and other input prices) remain
fixed as the price level increases
or decreases
Long Run Period in which nominal wages
are fully responsive to previous
changes in the price level
Copyright McGraw-Hill/Irwin, 2002
SHORT-RUN AGGREGATE SUPPLY
Short-Run and LongRun Aggregate Supply
A higher price level increases profits and
output moving the economy from a1 to a2
Short-Run Aggregate
Supply
AS1
Long-Run Aggregate
Supply
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
Price Level
Equilibrium with the
Extended AD-AS
Model
P2
P1
a2
a1
The Laffer Curve
Key Terms
Previous
Slide
End
Show
16 - 3
Next
Slide
o
Q1
Q2
Real domestic output
Copyright McGraw-Hill/Irwin, 2002
SHORT-RUN AGGREGATE SUPPLY
Short-Run and LongRun Aggregate Supply
A lower price level decreases profits and
output moving the economy from a1 to a3
Short-Run Aggregate
Supply
AS1
Long-Run Aggregate
Supply
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Key Terms
Previous
Slide
End
Show
16 - 4
Price Level
Equilibrium with the
Extended AD-AS
Model
P2
a2
P1
P3
a1
a3
Next
Slide
o
Q3
Q1
Q2
Real domestic output
Copyright McGraw-Hill/Irwin, 2002
LONG RUN AGGREGATE SUPPLY
Short-Run and LongRun Aggregate Supply
Short-Run Aggregate
Supply
A higher price level results in higher nominal
wages and thus shifts the short-run aggregate
supply to the left
ASLR AS2
Long-Run Aggregate
Supply
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
Price Level
Equilibrium with the
Extended AD-AS
Model
P2
P1
b1
AS1
a2
a1
The Laffer Curve
Key Terms
Previous
Slide
End
Show
16 - 5
Next
Slide
o
Copyright McGraw-Hill/Irwin, 2002
Q1
Q2
Real domestic output
LONG RUN AGGREGATE SUPPLY
Short-Run and LongRun Aggregate Supply
Short-Run Aggregate
Supply
A lower price level results reduces nominal
wages and shifts the short-run aggregate
supply to the right
ASLR AS2
Long-Run Aggregate
Supply
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
P2
Price Level
Equilibrium with the
Extended AD-AS
Model
b1
AS1
a2
AS3
a1
P1
The Laffer Curve
P3
Key Terms
Previous
Slide
End
Show
16 - 6
a3
c1
Next
Slide
o
Copyright McGraw-Hill/Irwin, 2002
Q3
Q1
Q2
Real domestic output
Short-Run and LongRun Aggregate Supply
EQUILIBRIUM IN THE
EXTENDED AD-AS MODEL
ASLR
Short-Run Aggregate
Supply
AS1
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Price Level
Long-Run Aggregate
Supply
a
P1
Key Terms
Previous
Slide
End
Show
16 - 7
AD1
Next
Slide
o
Q1
Real domestic output
Copyright McGraw-Hill/Irwin, 2002
DEMAND-PULL INFLATION
Short-Run and LongRun Aggregate Supply
ASLR
AS2
Short-Run Aggregate
Supply
AS1
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Price Level
Long-Run Aggregate
Supply
c
P3
b
P2
a
P1
Key Terms
Previous
Slide
End
Show
16 - 8
AD2
AD1
Next
Slide
o
Q1
Real domestic output
Copyright McGraw-Hill/Irwin, 2002
COST-PUSH INFLATION
Occurs when short-run AS shifts left
Short-Run and LongRun Aggregate Supply
ASLR
Short-Run Aggregate
Supply
AS1
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Price Level
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
AS2
b
P2
a
P1
Key Terms
Previous
Slide
End
Show
16 - 9
AD1
Next
Slide
o
Q2 Q 1
Real domestic output
Copyright McGraw-Hill/Irwin, 2002
COST-PUSH INFLATION
Government response with increased AD
Short-Run and LongRun Aggregate Supply
ASLR
Short-Run Aggregate
Supply
AS1
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Price Level
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
AS2
c
P3
b
P2
a
P1
Even
higher
price
levels
Key Terms
Previous
Slide
End
Show
16 - 10
AD2
AD1
Next
Slide
o
Q2 Q 1
Real domestic output
Copyright McGraw-Hill/Irwin, 2002
COST-PUSH INFLATION
If government allows a recession to occur
Short-Run and LongRun Aggregate Supply
ASLR
Short-Run Aggregate
Supply
AS1
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Price Level
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
AS2
b
P2
a
P1
Key Terms
Previous
Slide
End
Show
16 - 11
AD1
Next
Slide
o
Q2 Q 1
Real domestic output
Copyright McGraw-Hill/Irwin, 2002
COST-PUSH INFLATION
If government allows a recession to occur
Short-Run and LongRun Aggregate Supply
ASLR
Short-Run Aggregate
Supply
AS1
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Price Level
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
b
P2
a
P1
Key Terms
Previous
Slide
End
Show
16 - 12
AS2
Nominal
wages fall &
AS returns
to its original
location
AD1
Next
Slide
o
Q2 Q 1
Real domestic output
Copyright McGraw-Hill/Irwin, 2002
THE INFLATION-UNEMPLOYMENT
RELATIONSHIP
Short-Run and LongRun Aggregate Supply
Short-Run Aggregate
Supply
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Key Terms
Previous
Slide
End
Show
16 - 13
Next
Slide
• Normally, there is a short-run
trade-off between the rate of
inflation and the the rate of
unemployment
• Aggregate supply shocks can
cause both higher rates of
inflation and higher rates of
unemployment
• There is no significant trade-off
over long periods of time
Copyright McGraw-Hill/Irwin, 2002
Short-Run and LongRun Aggregate Supply
EFFECT OF CHANGES IN AGGREGATE DEMAND
ON REAL OUTPUT AND THE PRICE LEVEL
AD0
AS
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Key Terms
Previous
Slide
End
Show
16 - 14
Next
Slide
Price Level
Short-Run Aggregate
Supply
P0
o
Q0
Real domestic output
Copyright McGraw-Hill/Irwin, 2002
Short-Run and LongRun Aggregate Supply
EFFECT OF CHANGES IN AGGREGATE DEMAND
ON REAL OUTPUT AND THE PRICE LEVEL
AD0 AD1
AS
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Key Terms
Previous
Slide
End
Show
16 - 15
Next
Slide
Price Level
Short-Run Aggregate
Supply
P1
P0
o
Q0
Q1
Real domestic output
Copyright McGraw-Hill/Irwin, 2002
Short-Run and LongRun Aggregate Supply
EFFECT OF CHANGES IN AGGREGATE DEMAND
ON REAL OUTPUT AND THE PRICE LEVEL
AD0 AD1 AD2
AS
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Key Terms
Previous
Slide
End
Show
16 - 16
Next
Slide
Price Level
Short-Run Aggregate
Supply
P2
P1
P0
o
Q0
Q1
Q2
Real domestic output
Copyright McGraw-Hill/Irwin, 2002
Short-Run and LongRun Aggregate Supply
EFFECT OF CHANGES IN AGGREGATE DEMAND
ON REAL OUTPUT AND THE PRICE LEVEL
AD0 AD1 AD2 AD3
AS
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Key Terms
Previous
Slide
End
Show
16 - 17
Next
Slide
Price Level
Short-Run Aggregate
Supply
P3
P2
P1
P0
o
Q0
Q1
Q2 Q3
Real domestic output
Copyright McGraw-Hill/Irwin, 2002
THE PHILLIPS CURVE CONCEPT
Short-Run and LongRun Aggregate Supply
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Annual rate of inflation
(percent)
Short-Run Aggregate
Supply
7
As inflation declines...
6
5
Unemployment
increases
4
3
2
Key Terms
1
Previous
Slide
End
Show
16 - 18
Next
Slide
0
1
2
3
4
5
6
7
Unemployment rate (percent)
Copyright McGraw-Hill/Irwin, 2002
GLOBAL PERSPECTIVE
Short-Run and LongRun Aggregate Supply
The Misery Index, Selected Nations
Italy
1990 - 2000
U.K.
Short-Run Aggregate
Supply
Long-Run Aggregate
Supply
15
Canada
France
Equilibrium with the
Extended AD-AS
Model
U.S.
Germany
Demand-Pull Inflation
Cost-Push Inflation
10
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Key Terms
Previous
Slide
End
Show
16 - 19
Next
Slide
Japan
5
0
1990
Copyright McGraw-Hill/Irwin, 2002
1995
2000
Source: Bureau of Labor Statistics
THE LONG-RUN PHILLIPS CURVE
Short-Run and LongRun Aggregate Supply
Stagflation’s Demise
Short-Run Aggregate
Supply
Long-Run Aggregate
Supply
Aggregate-Supply Shocks
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
Short-Run Phillips Curve
The Phillips Curve
Taxation and Aggregate
Supply
The Laffer Curve
Key Terms
Previous
Slide
End
Show
16 - 20
Long-Run Vertical Phillips
Curve
Next
Slide
Disinflation
Copyright McGraw-Hill/Irwin, 2002
TAXATION AND AGGREGATE SUPPLY
Short-Run and LongRun Aggregate Supply
Short-Run Aggregate
Supply
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
Taxes and Incentives to
Work
Incentives to Save and
Invest
The Laffer Curve
Key Terms
Previous
Slide
End
Show
16 - 21
Supply-Side Economics
Next
Slide
Laffer Curve
Copyright McGraw-Hill/Irwin, 2002
THE LAFFER CURVE
100
Short-Run Aggregate
Supply
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
Tax rate (percent)
Short-Run and LongRun Aggregate Supply
The Laffer Curve
Key Terms
l
Previous
Slide
End
Show
16 - 22
Next
Slide
0
Tax revenue (dollars)
Copyright McGraw-Hill/Irwin, 2002
THE LAFFER CURVE
100
Short-Run Aggregate
Supply
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
Tax rate (percent)
Short-Run and LongRun Aggregate Supply
m
The Laffer Curve
Key Terms
l
Previous
Slide
End
Show
16 - 23
Next
Slide
0
Tax revenue (dollars)
Copyright McGraw-Hill/Irwin, 2002
THE LAFFER CURVE
100
Short-Run Aggregate
Supply
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
n
Tax rate (percent)
Short-Run and LongRun Aggregate Supply
m
The Laffer Curve
Key Terms
l
Previous
Slide
End
Show
16 - 24
Next
Slide
0
Tax revenue (dollars)
Copyright McGraw-Hill/Irwin, 2002
THE LAFFER CURVE
100
Short-Run Aggregate
Supply
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
Tax rate (percent)
Short-Run and LongRun Aggregate Supply
n
m
m
Maximum
Tax
Revenue
The Laffer Curve
Key Terms
l
Previous
Slide
End
Show
16 - 25
Next
Slide
0
Tax revenue (dollars)
Copyright McGraw-Hill/Irwin, 2002
Criticisms of the Laffer Curve
Short-Run and LongRun Aggregate Supply
Short-Run Aggregate
Supply
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxes, Incentives, and
Time
Inflation
Position on the Curve
Taxation and Aggregate
Supply
The Laffer Curve
Key Terms
Previous
Slide
End
Show
16 - 26
Chapter Conclusions
Next
Slide
Copyright McGraw-Hill/Irwin, 2002
short run
long run
short-run aggregate supply curve
long-run aggregate supply curve
Phillips Curve
stagflation
aggregate supply shocks
long-run vertical Phillips curve
disinflation
supply-side economics
Laffer Curve
Copyright McGraw-Hill/Irwin, 2002
BACK
END
Short-Run and LongRun Aggregate Supply
Short-Run Aggregate
Supply
Up next...
Long-Run Aggregate
Supply
Equilibrium with the
Extended AD-AS
Model
Demand-Pull Inflation
Cost-Push Inflation
The Phillips Curve
Taxation and Aggregate
Supply
Economic Growth and
the New Economy
The Laffer Curve
Key Terms
Previous
Slide
End
Show
16 - 28
Chapter 17
Next
Slide
Copyright McGraw-Hill/Irwin, 2002