Chapter Thirteen:

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Chapter Thirteen : Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

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Chapter Thirteen:. Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together. Aggregate Demand and Inflation. Figure 13.1: The Aggregate Demand Curve. …the level of Aggregate Demand falls. B. π 1. Inflation rate ( π ). A. If inflation rises…. π 0. Aggregate Demand (AD). - PowerPoint PPT Presentation

Transcript of Chapter Thirteen:

Chapter Thirteen:

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 13.1: The Aggregate Demand Curve

Output (Y )

Infl

atio

n r

ate

(π )

AD0

AD1

Figure 13.2: 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 13.3: The Aggregate Supply Curve

Output (Y )

Infl

atio

n r

ate

(π )

AS0

AS15 % -

3 % -

Figure 13.4: 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 13.5: 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 13.6: The Aggregate Demand and Supply Equilibrium in Recession

Output (Y )

Infla

tion

rate

) AS

Y*

AD1AD0

E1

E0

Unemployment

Figure 13.7: Expansionary Fiscal Policy in Response to a Recession

Output (Y )

Infla

tion

rate

) AS

Y*

AD1

AD0

E1

E0

Unemployment

Figure 13.8: A Greater Expansion of Aggregate Demand

Output (Y )

Infla

tion

rate

) AS

Y*

AD1

AD0

E1

E0

Wage-Price Spiral

Figure 13.9: 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 13.10: The Phillips Curve in the 1960s

Output (Y )

Infla

tion

rate

)

AS0

Y*

AD0

AD1

E0

E1AS1

Figure 13.11: Contractionary Fiscal Policy and Rising Inflationary Expectations

Output (Y )

Infla

tion

rate

)

AS0

AS1

AD

E1

E0

Lower Capacity

Figure 13.12: The Effect of the Oil Price Shock of the 1970s

Output (Y )

Infla

tion

rate

)

Y*

Unemployment

AD0

AD1

E0E1

AS1

AS0

Figure 13.13: The Effects of The Fed’s “Tight Money” Policies in the 1980s

0

Figure 13.14: Unemployment Trends 1960-2012 (Percentage of Labor Force)

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

Figure 13.15: Inflation Trends 1960-2012

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

Output (Y )

Infla

tion

rate

)

AS1

AS0

AS2

AD

E0

E2

E1

Higher Capacity

Figure 13.16: The Effects of Technological Innovation and Increased Efficiency

Competing Theories

Output (Y )

Infla

tion

rate

) Classical AS

Y*

AD

Figure 13.17: The Classical View of AS/AD

Output (Y )

Infla

tion

rate

)

Y*

AE1

AD0

E1

E0

Classical ASR

AS1

AS0

Figure 13.18: A New Classical View of Economic Fluctuations