EC 111 1st Edition Lecture 21Outline of Last LectureI. Short-Run Aggregated Supply Curve (SRAS)II. Why the Slope of the Short-Run Aggregated Supply Curve MattersIII. Three Theories of the Short-Run Aggregated Supply CurveIV. 1. The Sticky Wage TheoryV. 2. The Sticky Price TheoryVI. 3. The Misperception TheoryVII. What the Three Theories Have in CommonVIII. Short-Run Aggregated Supply and Long-Run Aggregated SupplyIX. Why the Short-Run Aggregated Supply Curve Might ShiftX. The Long-Run EquilibriumXI. Economic Fluctuation Outline of Current LectureI. Chapter 22: IntroductionII. The Phillips CurveIII. Deriving the Phillips CurveIV. The Phillips Curve: A Policy Menu?V. The Vertical Long-Run Phillips CurveCHAPTER 22: INTRODUCTION- In the long-run, inflation and unemployment are unrelatedo Inflation rate depends mainly on growth of the money supplyo Unemployment (the natural rate) depends on the minimum wage, the market powerof unions, efficiency wages, and the process of job search- One of the ten principles of economics:o In the short-run, society faces a trade off between inflation and unemploymentTHE PHILLIPS CURVE- The Phillips Curve: shows the short-run tradeoff between inflation and unemploymento There is a negative correlation between the twoDERIVING THE PHILLIPS CURVE- Suppose price level=100 this yearThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- The following are two possible outcomes for next yearo Aggregated demand low. Small increase in price level, low output, and high unemploymento Aggregate demand high. Big increase in price level, high output, and low unemploymentTHE PHILLIPS CURVE: A POLICY MENU?- Since fiscal and monetary policy affect aggregate demand, the Phillips curve appeared to offer policymakers a menu of choiceso Low unemployment with high inflationo High unemployment with low inflationo Anything between- US data support the Phillips curve in the 1960s. many believe the Phillips curve is stable and reliableTHE VERTICAL LONG-RUN PHILLIPS CURVE- The tradeoff is temporary- Natural-Rate Hypothesis: the claim that unemployment eventually returns to its normal or “natural” rate regardless of the inflation rateo Based on classical dichotomy and the vertical long-run aggregated supply
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