Mankiw 5e Chapter 13 Aggregate Supply

macroeconomicsfiftheditionN.GregoryMankiwPowerPoint®SlidesbyRonCronovichmacro©2002WorthPublishers,allrightsreservedTopic11:AggregateSupply(Chapter13)CHAPTER13AggregateSupplyslide1AnewandimprovedshortrunAScurveYP_____________________________________________________Consideramorerealisticcase,inbetweenthetwoextremeassumptionsweconsideredbefore.CHAPTER13AggregateSupplyslide2ThreemodelsofaggregatesupplyConsider3storiesthatcouldgiveusthisSRAS:1.Thesticky-wagemodel2.Theimperfect-informationmodel3.Thesticky-pricemodel()eYYPPnaturalrateofoutputapositiveparametertheexpectedpriceleveltheactualpricelevelagg.outputCHAPTER13AggregateSupplyslide3Thesticky-wagemodelAssumesthatfirmsandworkersnegotiatecontractsandfixthenominalwage____________________________________.Thenominalwage,W,theysetistheproductofatargetrealwage,,andtheexpectedpricelevel:eWωP______________CHAPTER13AggregateSupplyslide4Thesticky-wagemodelIfitturnsoutthateWPωPPthenunemploymentandoutputareattheirnaturalratesRealwageislessthanitstarget,sofirmshiremoreworkersandoutputrisesaboveitsnaturalrateRealwageexceedsitstarget,sofirmshirefewerworkersandoutputfallsbelowitsnaturalrateCHAPTER13AggregateSupplyslide5Realwage,W/PIncome,output,YPricelevel,PIncome,output,YLabor,LLabor,LW/P1W/P2L5Ld(W/P)L2L1Y2Y1Y5F(L)L2L1P2P1Y5Y1a(P2Pe)Y2Y11.Anincreaseinthepricelevel..3....whichraisesemployment,..4....output,..5....andincome.2....reducestherealwageforagivennominalwage,..6.Theaggregatesupplycurvesummarizesthesechanges.(a)LaborDemand(b)ProductionFunction(c)AggregateSupplyCHAPTER13AggregateSupplyslide6Thesticky-wagemodelImpliesthattherealwageshouldbe_____________,___________________________________overthecourseofbusinesscycles:–Inbooms,whenPtypicallyrises,therealwageshouldfall.–Inrecessions,whenPtypicallyfalls,therealwageshouldrise.Thispredictiondoesnotcometrueintherealworld:CHAPTER13AggregateSupplyslide7ThecyclicalbehavioroftherealwagePercentagechangeinrealwagePercentagechangeinrealGDP1982197519931992196019961999199719981979197019801991197419901984200019721965-3-2-101237865443210-1-2-3-4-5CHAPTER13AggregateSupplyslide8Theimperfect-informationmodelAssumptions:allwagesandpricesperfectlyflexible,_____________eachsupplierproducesonegood,consumesmanygoodseachsupplierknowsthenominalpriceofthegoodsheproduces,_______________________________CHAPTER13AggregateSupplyslide9Theimperfect-informationmodelSupplyofeachgooddepends___________________:thenominalpriceofthegooddividedbytheoverallpricelevel.Supplier_______________atthetimeshemakesherproductiondecision,sousestheexpectedpricelevel,Pe.SupposePrisesbutPedoesnot.Thensupplierthinksherrelativepricehasrisen,sosheproducesmore.Withmanyproducersthinkingthisway,__________________________.CHAPTER13AggregateSupplyslide10Thesticky-pricemodelReasonsforstickyprices:–––Assumption:–Firmssettheirownprices(e.g.asinmonopolisticcompetition)CHAPTER13AggregateSupplyslide11Thesticky-pricemodelAnindividualfirm’sdesiredpriceiswherea0.Supposetwotypesoffirms:•firmswith________prices,setpricesasabove•firmswith________prices,mustsettheirpricebeforetheyknowhowPandYwillturnout:()pPYYaCHAPTER13AggregateSupplyslide12Thesticky-pricemodelAssumefirmsw/stickypricesexpectthatoutputwillequalitsnaturalrate.Then,()eeepPYYaToderivetheaggregatesupplycurve,wefirstfindanexpressionfortheoverallpricelevel.Letsdenotethefractionoffirmswithstickyprices.Then,wecanwritetheoverallpricelevelasCHAPTER13AggregateSupplyslide13Thesticky-pricemodelSubtract(1s)Pfrombothsides:(1)[()]ePsPsPYYapricesetbyflexiblepricefirmspricesetbystickypricefirms(1)[()]esPsPsYYaDividebothsidesbys:(1)()esPPYYsaCHAPTER13AggregateSupplyslide14Thesticky-pricemodel________________Iffirmsexpecthighprices,thenfirmswhomustsetpricesinadvancewillsetthemhigh.Otherfirmsrespondbysettinghighprices.________________Whenincomeishigh,thedemandforgoodsishigh.Firmswithflexiblepricessethighprices.Thegreaterthefractionofflexiblepricefirms,thesmallerissandthebiggeristheeffectofYonP.(1)()esPPYYsaCHAPTER13AggregateSupplyslide15Thesticky-pricemodelFinally,deriveASequationbysolvingforY:(1)()esPPYYsawhere(1)ssaCHAPTER13AggregateSupplyslide16Thesticky-pricemodelIncontrasttothesticky-wagemodel,thesticky-pricemodelimpliesa_______________:Supposeaggregateoutput/incomefalls.Then,Firmsseeafallindemandfortheirproducts.Firmswithstickypricesreduceproduction,andhencereducetheirdemandforlabor.Theleftwardshiftinlabordemandcausestherealwagetofall.CHAPTER13AggregateSupplyslide17Summary&implicationsEachofthethreemodelsofagg.supplyimplytherelationshipsummarizedbytheSRAScurve&equationYPLRASYSRAS()eYYPPePPePPePPCHAPTER13AggregateSupplyslide18Summary&implicationsSupposeapositiveADshockmovesoutputaboveitsnaturalrateandPabovethelevelpeoplehadexpected.YPLRASSRAS1equation:()eYYPPSRAS11ePPAD12ePOvertime,Perises,SRASshiftsup,andoutputreturnstoitsnaturalrate.1YY3YCHAPTER13AggregateSupplyslide19Inflation,Unemployment,andthePhillipsCurveThePhillipscurvestatesthatdependso