1) The document discusses four models of short-run aggregate supply: the sticky-price model, imperfect information model, and sticky-wage model.
2) In the sticky-price model, some prices are fixed in the short-run due to contracts or costs of changing prices. This can cause output to deviate from natural levels when demand changes.
3) The imperfect information model assumes suppliers don't know the overall price level when making decisions. Output will rise if actual prices are above expected prices.
4) In the sticky-wage model, nominal wages are fixed by contracts in the short-run. A price rise will lower real wages and induce firms to hire more workers and produce more output
The classical doctrine—that the economy is always at or near the natural level of real GDP (full employment)—is based on two firmly held beliefs:
The assumption of the full employment of labour and other productive resources
Belief that prices, wages, and interest rates are flexible.
Keynesian Theory
Neo classical general equilibrium theory which is based on Walrasian theory of general equilibrium 2*2*2 model and Marshallian graphical representation
The classical doctrine—that the economy is always at or near the natural level of real GDP (full employment)—is based on two firmly held beliefs:
The assumption of the full employment of labour and other productive resources
Belief that prices, wages, and interest rates are flexible.
Keynesian Theory
Neo classical general equilibrium theory which is based on Walrasian theory of general equilibrium 2*2*2 model and Marshallian graphical representation
Aggregate Demand And Aggregate Supply Model (With Variable Price Level).pdfSadman Naveed
Aggregate demand (AD) curve: A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government (both inside and outside of the country).
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1 Aggregate Demand 4. Explain the intuition behind the wea.docxoswald1horne84988
1 Aggregate Demand
4. Explain the intuition behind the wealth, interest rate, and exchange rate effects.
The intuition behind the real wealth effect is that when the price level decreases, it takes less
money to buy goods and services. The money you have is now worth more and you feel
wealthier. So, in response to a decrease in the price level, real GDP will increase. More
formally, this means that when households’ assets are worth more in terms of their
purchasing power, they are more likely to purchase more goods and services.
The opposite happens when the price level increases. If the price of everything increases, but
the number of dollars you have doesn’t, then you have to cut back on spending. Some
shorthand of this chain of events can help us wrap our heads around this:
PL↓→real wealth ↑→consumption increases→move right along AD curve
The intuition behind the interest rate effect is that when the price level decreases, you need
less money in your pocket to buy stuff. The less money you need to keep on hand to buy
stuff, the more money you are going to keep in a bank. Banks pay interest to try to lure
people to deposit their money in banks. So, if you are going to keep more money in the bank
anyway, banks don’t have to offer as much interest in order to convince you; that drives
interest rates down. As a result, businesses and households spend more money on investment
and “big ticket” items that are interest sensitive, like X, Y, and Z. So, once again, a decrease
in the price level will increase real GDP.
On the other hand, a higher price level will drive up interest rates. Remember how a higher
price level would make everyone’s dollars are worth less, and they cut back on consumption?
Well, what if they didn’t want to cut back on consumption. Instead, maybe they sell off some
other asset like a bond to try to get more money. The problem is, every other bondholder is
also trying to sell off their bonds, so there are no buyers! Anyone who wants to issue a new
bond is going to have to do something to try to attract buyers. The way to do that is to raise
the interest rate that is offered. All of that excess demand for money leads to an increase in
the interest rate.
Finally, the intuition behind the exchange rate effect is that a decrease in the price level in
country A makes its goods cheaper to country B, so country B buys more of country A’s
exports. When the price level in one country goes down, its goods are suddenly more
attractive to every other country. It’s like the whole country is on sale! Since that country’s
goods are suddenly cheaper, their exports go up.
2 Multipliers
4. Households in Iron Island save 10% of every additional dollar in income that they
receive. What will happen to aggregate demand Maggietopia if there is a $4 billion
increase in lump-sum taxes?
Note: Please answer this question on your own.
3 Short-run Aggregate Supply (SRAS)
.
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@Pi_vendor_247
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
where can I find a legit pi merchant onlineDOT TECH
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A pi merchant is someone who buys pi network coins and resell them to Investors looking forward to hold thousands of pi coins before the open mainnet.
I will leave the telegram contact of my personal pi merchant to trade with
@Pi_vendor_247
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
BYD SWOT Analysis and In-Depth Insights 2024.pptxmikemetalprod
Indepth analysis of the BYD 2024
BYD (Build Your Dreams) is a Chinese automaker and battery manufacturer that has snowballed over the past two decades to become a significant player in electric vehicles and global clean energy technology.
This SWOT analysis examines BYD's strengths, weaknesses, opportunities, and threats as it competes in the fast-changing automotive and energy storage industries.
Founded in 1995 and headquartered in Shenzhen, BYD started as a battery company before expanding into automobiles in the early 2000s.
Initially manufacturing gasoline-powered vehicles, BYD focused on plug-in hybrid and fully electric vehicles, leveraging its expertise in battery technology.
Today, BYD is the world’s largest electric vehicle manufacturer, delivering over 1.2 million electric cars globally. The company also produces electric buses, trucks, forklifts, and rail transit.
On the energy side, BYD is a major supplier of rechargeable batteries for cell phones, laptops, electric vehicles, and energy storage systems.
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
What website can I sell pi coins securely.DOT TECH
Currently there are no website or exchange that allow buying or selling of pi coins..
But you can still easily sell pi coins, by reselling it to exchanges/crypto whales interested in holding thousands of pi coins before the mainnet launch.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and resell to these crypto whales and holders of pi..
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How can I sell my pi coins?
Selling pi coins is really easy, but first you need to migrate to mainnet wallet before you can do that. I will leave the telegram contact of my personal pi merchant to trade with.
Tele-gram.
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how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
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when will pi network coin be available on crypto exchange.DOT TECH
There is no set date for when Pi coins will enter the market.
However, the developers are working hard to get them released as soon as possible.
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But for now the only way to sell your pi coins is through verified pi vendor.
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The Evolution of Non-Banking Financial Companies (NBFCs) in India: Challenges...beulahfernandes8
Role in Financial System
NBFCs are critical in bridging the financial inclusion gap.
They provide specialized financial services that cater to segments often neglected by traditional banks.
Economic Impact
NBFCs contribute significantly to India's GDP.
They support sectors like micro, small, and medium enterprises (MSMEs), housing finance, and personal loans.
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
2. 2.1 The Classical approach to aggregate supply
Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
Aggregate supply is the relationship between quantity of goods
and services supplied and the price level.
we need to discuss two different aggregate supply curves:
long run aggregate supply curve LRAS (the classical supply
curve) and
short-run aggregate supply curve SRAS (the Keynesian supply
curve).
Finally an attempt will be made to present four prominent
models of short-run aggregate supply curve.
2
3. The Long Run: the Vertical Aggregate Supply Curve
Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
Classical model describes how the economy behaves in
the long run,
we derive the long-run aggregate supply curve from the
classical model.
The classical aggregate supply curve is vertical,
it is indicating that the same amount of goods will be
supplied whatever the price level or
output does not depend on the price level
The classical supply curve is based on the assumption
labor market is in equilibrium with full employment
of labor
3
5. Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
If the aggregate supply curve is vertical, then
changes in aggregate demand affect prices but not
output.
For example, if the money supply falls, the
aggregate demand curve shifts downwards.
The economy moves from point A to point B.
If it is an increase in money supply, the
economy moves from A to C.
The shift in aggregate demand affects only prices.
5
7. Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
The classical model and the vertical aggregate supply
curve apply only in the long run.
In the short run, some prices are sticky and, therefore, do
not adjust to changes in demand.
Because of this price stickiness, short run aggregate
supply curve is not vertical
This is what we call the Keynesian aggregate supply
curve.
In the extreme Keynesian case
Aggregate supply curve is horizontal;
Indicating that firms will supply whatever amount of
goods is demanded at the existing price level
7
9. Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
The idea underlying the Keynesian aggregate supply curve is
that
because there is unemployment, firms can obtain as much
labor as they want at the current wage.
Their average costs of production therefore are assumed not
to change as their output levels change.
The short run equilibrium of the economy is obtained
at the intersection of the AD curve and the horizontal AS
curve.
In this case changes in aggregate demand either through fiscal
policy or monetary policy
affect the level of out put in the economy.
9
10. Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
Suppose central bank reduces the money supply and
aggregate demand curve shifts downward .
In the short run, prices are sticky, so the economy
moves from point A to point B.
Output and employment fall below their natural
levels, which means the economy, is in recession.
Over time, in response to the low demand, wages and
prices fall.
The gradual reduction in the price level moves the
economy down ward along the aggregate demand
curve to pint C, which is the new long run
equilibrium.
10
12. 2.2 The Keynesian approach to aggregate supply
Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
2.2.1 The Four Models of Aggregate Supply
In the long run, prices are flexible, and the aggregate supply curve
is vertical.
When the aggregate supply curve is vertical, shifts in the aggregate
demand curve affects the price level, but output remains
unchanged.
In the short run, prices are sticky, and the aggregate supply curve is not vertical.
In this case, shifts in the aggregate demand do cause fluctuations in output.
In extreme Keynesian case where aggregate supply curve is horizontal in which
all prices are fixed.
In this section we study four models of short-run AS curve.
Although these models differ in some significant details, but with common
conclusion that short-run aggregate supply curve is upward sloping .
12
13. aggregate supply equation of the form.
Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
Where Y is output, is the natural rate of output, p is
the price level, and pe is the expected price level.
This equation states that output deviates from its natural
rate when the price level deviates from the expected
price level.
The parameter α indicates how much output responds to
unexpected changes in the price level
Each of these models tells different story about what lies
behind this short-run aggregate supply equation.
13
14. 1. The Sticky – Price Model
Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
This model emphasizes that firms do not instantly adjust the prices they
charge in response to changes in demand.
Prices are sticky b/c
Sometimes prices are set by long-term contracts between firms and
customers.
Firms may hold prices steady in order not to annoy their regular
customers
Some prices are sticky because once a firm has printed and distributed its
catalog or price list, it is costly to alter prices.
To see how sticky prices can help explain an upward sloping aggregate
supply curve,
we first consider the pricing decisions of individual firms and then add to
explain the behavior of the economy as a whole.
14
15. Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
The firm’s desired price P depends
The overall level of prices P &
The level of aggregate income Y
The overall level of prices P.
A higher price level implies that the firm’s costs are
higher.
Hence, the higher the overall price level, the more the
firm would like to charge for its product.
The level of aggregate income Y.
A higher level of income raises the demand for the firm’s
product.
Because marginal cost increases at higher levels of production,
the greater the demand, the higher the firm’s desired price.
)
15
16. We write the firm’s desired pre as
Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
This equation says that the desired price p depends
on the overall level of prices P and
on the level of aggregate output relative to the natural rate
The parameter α measures how much the firm’s desired price
responds to the level of aggregate output.
Now assume that there are two types of firms.
Some have flexible prices: they always set their prices
according to this equation.
Others have sticky prices: they announce their prices in
advance based on what they expect economic conditions to be.
- Firms with sticky prices set prices according to
16
)
17. .
Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
For simplicity, assume that these firms expect output to be at its
natural rate, so that the last term is zero.
Then these firms set the price
P= Pe
We can use the pricing rules of the two groups of firms to derive
the aggregate supply equation.
To do this, we find the overall price level in the economy, which
is the weighted average of the prices set by the two groups.
If s is the fraction of firms with sticky prices and
1-s the fraction with flexible-prices,
)
17
18. Then the overall price level is
Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
Now subtract (1-s)p from both sides of this equation to obtain
Divide both sides by s to solve for the overall price level:
Hence, the overall all price level depends on the expected price
level and on the level of output.
where α = s/[1-s) β]. We have
The deviation of output from the natural rate is positively
associated with the deviation of the price level from the
expected price level.
18
19. 2.The Imperfect Information Model
Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
Assumptions:
All wages and prices are perfectly flexible, all markets clear.
Each supplier produces one good, consumes many goods.
Each supplier knows the nominal price of the good she/he produces, but
does not know the overall price level.
Supply of each good depends on its relative price: the nominal price of the
good divided by the overall price level.
Supplier does not know price level at the time he/she makes her production
decision, so uses Pe.
Suppose P rises but Pe does not.
Supplier thinks her /his relative price has risen, so she produces more.
With many producers thinking this way, Y will rise whenever P rises
above Pe
19
20. 3. The Sticky- Wage Model
Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
In this Model wages are sticky in the short run due to:-
In many industries, nominal wages are set by long-term contracts
Even in industries where there is no such formal contract, implicit
agreements between workers and firms may limit wage changes.
Wages may also depend on social norms and notions of fairness
To understand the model let us consider what happens to the amount of
output produced when the p rises
When nominal wage is sticky , a rise in the p lowers the real wage
(W/P), making labor cheaper.
The lower real wage induces firms to hire more labor because labor
demand is a function of (W/P).
The additional labor hired produces more output since output(Y) is a
function of employment (L)
20
21. Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
labor demand function L = Ld(W/P)
This function states that the lower the real wage, the more
labor firms hire.
Output is determined by the production function Y=F(L)
This function states that the more labor is hired, the more
output is produced
This positive r/p b/n the price level and the amount of
output means that the aggregate supply curve slopes
upward during the time when nominal wage cannot adjust.
21
22. Sticky wage model can be analyzed graphically
Lecturer note on Macroeconomics-II WSU By Zegeye Paulos22
23. Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
Panel (a) shows the labor demand curve.
Because the nominal wageW is stuck, an increase in the P from p1 to p2
reduces real wage from w/p1 toW/p2.
The lower real wage raises the quantity of labor demanded from L1 to L2.
Panel (b) shows the production function.
An increase in the quantity of labor from L1 to L2 raises output fromY1 to
Y2.
Panel (c) on the other hand shows the aggregate supply curve that
summarizes the relationship between the price level and output.
An increase in the price level from p1 to p2 raises output fromY1 toY2.
The equation states that output deviates from its natural rate when the
price level deviates from the expected price level.
23
24. 4.The workers-misperception model
Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
This model like that of the sticky wage model focuses on the labor
market.
It assumes wages are not sticky, but they are free to equilibrate supply and
demand in the labor market.
Its key principle is that workers temporary confuse real and nominal
wages.
Where Ld= f(W/P), is a function of the real wage ----------------------1
While Ls= f(W/Pe).is a function of the real wage workers expect-------2
Workers know W, but they do not know the overall price P.
Hence, when they decide on how labour to supply, workers know their
nominal wage but not the overall price level(P).
Expected real wage = actual real wage X workers misperception of price
W/Pe=W/P*P/Pe--------------------------------------------3
If we subs. Eq 3 in eq 2 we get LS= f(W/P*P/Pe)---------------------4
it implies labor supply is depends on the real wage and worker’s
misperceptions of price level.
24
25. Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
According to this model an unexpected rise in the price level makes
workers feel that the real wage has gone up. But this is a false belief
Living in a world of illusion they are induced to supply more labor
at the initial real wage.
This reduces the real wage from (W/P)1 to (W/P)2 and rises the
demand for labor from L1 to L2
The end result is a rise in employment ,output and income
25
26. Conclusion
Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
In this part we have seen different models of aggregate supply
to explain why the short run aggregate supply curve is
upward sloping.
Short run equilibrium in the economy can now be explained by
combining aggregate demand and aggregate supply
26
28. Lecturer note on Macroeconomics-II WSU By Zegeye Paulos
In the short run, the equilibrium moves from point A to B.
the increase in aggregate demand raises the actual price level from P1
to P2.
Because people did not expect this increase in the price level, the
expected price level remains at Pe2, and output rises from Y1 to Y2,
which is above the natural rate Y.
Thus, the unexpected expansion in aggregate demand
causes the economy to boom.
Yet the boom does not last forever.
In the long run, the expected price level rises to catch up with
reality, causing the SR aggregate supply curve to shift upward.
As the expected price level rises from Pe2 to Pe3, the equilibrium
of the economy moves from point B to point C.
The actual price level rises from P2 to P3, and output falls from Y2
to Y3 = Y .
In other words, the economy returns to the natural level of output in
the long run, but at a much higher price level.
28
29. Inflation, Unemployment, and the Phillips Curve
Lecturer note on Macroeconomics-II WSU By Zegeye
Paulos
29
Two goals of economic policymakers are low inflation and low
unemployment, but often these goals conflict.
Suppose, for instance, that policymakers were to use monetary
or fiscal policy to expand aggregate demand.
This policy would move the economy along the short-run
aggregate supply curve to a point of higher output and a higher
price level. (Figure -2 shows this as the change from point A to
point B.)
Higher output means lower unemployment, because firms
employ more workers when they produce more.
A higher price level, given the previous year’s price level,
means higher inflation.
30. 30
Thus, when policymakers move the economy up along the
short-run aggregate supply curve, they reduce the
unemployment rate and raise the inflation rate.
Conversely, when they contract aggregate demand and move
the economy down the short-run aggregate supply curve,
unemployment rises and inflation falls.
This tradeoff between inflation and unemployment, called the
Phillips curve
the Phillips curve is a reflection of the short-run aggregate
supply curve: as policymakers move the economy along the
short-run aggregate supply curve, unemployment and inflation
move in opposite directions.
The Phillips curve is a useful way to express aggregate supply
because inflation and unemployment are such important
measures of economic performance.Lecturer note on Macroeconomics-II WSU By Zegeye
Paulos
31. Deriving the Phillips Curve From the Aggregate Supply Curve
31
The Phillips curve in its modern form states that the inflation rate
depends on
three forces:
Expected inflation
The deviation of unemployment from the natural rate, called
cyclical unemployment
Supply shocks.
where β is a parameter measuring the response of inflation to cyclical
unemployment.
Notice that there is a minus sign before the cyclical unemployment term:
other things equal, higher unemployment is associated with lower
inflation.Lecturer note on Macroeconomics-II WSU By Zegeye
Paulos
32. 32
Where does this equation for the Phillips curve come from?
Although it may not seem familiar, we can derive it from our
equation for aggregate supply.
To see how, write the aggregate supply equation as
With one addition, one subtraction, and one substitution, we can
transform this equation into the Phillips curve relationship between
inflation and unemployment.
Here are the three steps.
First, add to the right-hand side of the equation a supply shock v to
represent exogenous events (such as a change in world oil prices) that alter
the price level and shift the short-run aggregate supply curve:
Lecturer note on Macroeconomics-II WSU By Zegeye
Paulos
33. 33
Next, to go from the price level to inflation rates, subtract last year’s
price level P−1 from both sides of the equation to obtain
The term on the left-hand side, P - P-1,is the difference between the
current price level and last year’s price level, which is inflation π
The term on the right-hand side, EP -P-1,is the difference between the
expected price level and last year’s price level, which is expected
inflation Eπ.Therefore, we can replace P − P−1 with π and Eπ -P-1
with Eπ:
Lecturer note on Macroeconomics-II WSU By Zegeye
Paulos
34. 34
Third, to go from output to unemployment, the Okun’s law gives a
relationship between these two variables.
One version of Okun’s law states that the deviation of output from
its natural level is inversely related to the deviation of
unemployment from its natural rate; that is, when output is higher
than the natural level of output, unemployment is lower than the
natural rate of unemployment. We can write this as
Using this Okun’s law relationship, we can substitute
in the previous equation to obtain:
Thus, we can derive the Phillips curve equation from the aggregate
supply equation.
Lecturer note on Macroeconomics-II WSU By Zegeye
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