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13 Macroeconomics
13 Macroeconomics
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 1 of 25
CHAPTER 13 Aggregate Supply and the Equilibrium Price Level
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 2 of 25
PART III THE CORE OF MACROECONOMIC THEORY
13
Aggregate Supply
and the
Equilibrium
Price Level
Prepared by:
Fernando & Yvonn Quijano
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster
PART III THE CORE OF MACROECONOMIC THEORY
11
13
Aggregate Supply
and the
Equilibrium
CHAPTER 13 Aggregate Supply and the Equilibrium Price Level
Causes of Inflation
Demand-Pull Inflation
Cost-Push, or Supply-Side, Inflation
Expectations and Inflation
Money and Inflation
Sustained Inflation as a Purely Monetary
Phenomenon
Looking Ahead
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 4 of 25
The Aggregate Supply Curve
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 5 of 25
The Aggregate Supply Curve
Aggregate Supply in the Short Run
CHAPTER 13 Aggregate Supply and the Equilibrium Price Level
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 6 of 25
The Aggregate Supply Curve
Shifts of the Short-Run Aggregate Supply Curve
curve.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 7 of 25
The Equilibrium Price Level
curves intersect.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 8 of 25
The Long-Run Aggregate Supply Curve
CHAPTER 13 Aggregate Supply and the Equilibrium Price Level
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 9 of 25
The Long-Run Aggregate Supply Curve
The Simple
CHAPTER 13 Aggregate Supply and the Equilibrium Price Level
“Keynesian” Aggregate
Supply Curve
One view of the aggregate
supply curve, the simple
“Keynesian” view, holds that at
any given moment, the economy
has a clearly defined capacity,
or maximum, output.
With planned aggregate expenditure of AE1
and aggregate demand of AD1, equilibrium
output is Y1.
A shift of planned aggregate expenditure to
AE2, corresponding to a shift of the AD curve
to AD2, causes output to rise but the price
level to remain at P1.
If planned aggregate expenditure and
aggregate demand exceed YF, however,
there is an inflationary gap and the price level
rises to P3.
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 10 of 25
The Long-Run Aggregate Supply Curve
Potential GDP
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Monetary and Fiscal Policy Effects
CHAPTER 13 Aggregate Supply and the Equilibrium Price Level
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 12 of 25
Monetary and Fiscal Policy Effects
CHAPTER 13 Aggregate Supply and the Equilibrium Price Level
FIGURE 13.6 A Shift of the Aggregate Demand Curve When the Economy Is Operating at or Near
Maximum Capacity
If a shift of aggregate demand occurs while the economy is operating near full capacity, the result will be
an increase in the price level with little increase in output from point B to point B’.
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Monetary and Fiscal Policy Effects
Long-Run Aggregate Supply and Policy Effects
CHAPTER 13 Aggregate Supply and the Equilibrium Price Level
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 14 of 25
Causes of Inflation
Demand-Pull Inflation
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 15 of 25
Causes of Inflation
Cost-Push, or Supply-Side, Inflation
CHAPTER 13 Aggregate Supply and the Equilibrium Price Level
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 16 of 25
Causes of Inflation
Cost-Push, or Supply-Side, Inflation
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 17 of 25
Causes of Inflation
Expectations and Inflation
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 18 of 25
Causes of Inflation
Money and Inflation
CHAPTER 13 Aggregate Supply and the Equilibrium Price Level
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 19 of 25
Causes of Inflation
Sustained Inflation as a Purely Monetary Phenomenon
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The Behavior of the Fed
CHAPTER 13 Aggregate Supply and the Equilibrium Price Level
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The Behavior of the Fed
Controlling the Interest Rate
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The Behavior of the Fed
The Fed’s Response to the State of the Economy
CHAPTER 13 Aggregate Supply and the Equilibrium Price Level
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The Behavior of the Fed
The Fed’s Response to the State of the Economy
CHAPTER 13 Aggregate Supply and the Equilibrium Price Level
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The Behavior of the Fed
Fed Behavior Since 1970
CHAPTER 13 Aggregate Supply and the Equilibrium Price Level
FIGURE 13.13 Output, Inflation, and the Interest Rate 1970 I–2007 IV
The Fed generally had high interest rates in the two inflationary periods and low interest rates from the mid
1980s on. It aggressively lowered interest rates in the 1990 IV–1991 I and 2001 I–2001 III recessions.
Output is the percentage deviation of real GDP from its trend. Inflation is the 4-quarter average of the
percentage change in the GDP deflator. The interest rate is the 3- month Treasury bill rate.
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The Behavior of the Fed
Inflation Targeting
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REVIEW TERMS AND CONCEPTS
aggregate supply
CHAPTER 13 Aggregate Supply and the Equilibrium Price Level
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