Bài giảng Macro - Chapter 15 Long Run Macroeconomic Adjustments

Chapter 15Long RunMacroeconomic AdjustmentsSLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGEIn this chapter you will learnTo apply the long-run AD-AS modelAbout the inflation-unemployment relationshipAbout the effects of taxation on aggregate supplyChapter 15 TopicsApplying the Long-Run AD-AS ModelThe Inflation-Unemployment RelationshipTaxation & Aggregate SupplyApplying the Long-RunAD-AS ModelDemand-pull inflation occurs when an increase in aggregate demand pulls up the price levelPrice LevelReal domestic outputoAS1Demand-Pull InflationPL1QfThe startingpoint is fullemploymentGDP (Qf )AD1Figure 15-1© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 155oAS1PL1QfSomething causes AD to increasewhat are some possibilities?AD1Demand-Pull InflationFigure 15-1© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 156Price LevelReal domestic outputoAS1PL1QfHigher demandleads to ahigher price level, and higher outputAD1PL2AD2Q2Demand-Pull InflationFigure 15-1© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 157Price LevelReal domestic outputoAS1PL1QfAD1PL2AD2Q2A higher pricelevel (PL2 ) EVENTUALLYleads to highernominal wageswhich causes....Demand-Pull InflationFigure 15-1© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 158Price LevelReal domestic outputoAS1PL1PL3QfQ2AD2A left shift ofthe short runAS curveAS2PL2AD1Demand-Pull InflationFigure 15-1© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 159Price LevelReal domestic outputDemand-Pull Inflationin the short run, demand-pull inflation drives up prices and outputin the long run, output is restored to Qf and only the price level is higherCost-Push InflationCost-push inflation arises from factors that increase the cost of production at each price leveloAS1PL1QfSomething drives up production costssuch as?AD1Cost-Push InflationFigure 15-2Price LevelReal domestic output© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1512oAS1PL1QfAS shifts to the left, leading to higher prices and lower outputAD1AS2Q2PL2Price LevelReal domestic output© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1513Cost-Push InflationFigure 15-2oAS1PL1QfNow what?Left alone, the economy will eventually make its way back to QfAD1AS2Q2PL2HOW?Price LevelReal domestic output© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1514Cost-Push InflationFigure 15-2oAS1PL1QfLayoffs, high unemployment will eventually lead to lower factor pricesAD1AS2Q2PL2Price LevelReal domestic output© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1515Cost-Push InflationFigure 15-2oAS1PL1QfWhat other options are there?AD1AS2Q2PL2Price LevelReal domestic output© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1516Cost-Push InflationFigure 15-2oAS1PL1QfExpansionary fiscal or monetary policyAD1AS2Q2PL2AD2PL3Price LevelReal domestic output© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1517Cost-Push InflationFigure 15-2oAS1PL1QfButworkers have suffered real wage losses, so--?AD1AS2Q2PL2AD2PL3Price LevelReal domestic output© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1518Cost-Push InflationFigure 15-2oAS1PL1QfAD1AS2Q2PL2AD2PL3AS3PL4Price LevelReal domestic output© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1519Cost-Push InflationoAS1PL1QfAD1AS2Q2PL2AD2PL3This could set off an inflationary spiral—AS shifts left, and government will have to act again to prevent recessionAS3PL4Price LevelReal domestic output© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1520Cost-Push InflationCost-Push Inflationif government attempts to maintain full employment, an inflationary spiral may occurotherwise, there will be a recession, with high unemployment and a loss of outputRecession & the Long-Run AD-AS Modelhow long would it take in the real world for price & wage adjustments to occur, to regain full employment?probably a long timeChapter 15 TopicsApplying the Long-Run AD-AS ModelThe Inflation-Unemployment RelationshipTaxation & Aggregate SupplyThe Inflation-Unemployment RelationshipUnder normal circumstances, there is a short-run tradeoff between inflation & unemploymentAggregate supply shocks can cause both higher inflation & higher unemploymentThere is no significant tradeoff between inflation & unemployment over long periods of timeThe Phillips CurveAssuming a constant AS, high rates of inflation are accompanied by low rates of unemployment, & vice-versaillustratedoPL0Q0ASAD0The Phillips CurveFigure 15-4© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1526Price LevelReal domestic outputoPL0PL1Q0Q1ASAD0AD1The Phillips CurveFigure 15-4© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1527Price LevelReal domestic outputoPL0PL1PL2Q0Q1Q2ASAD0AD1AD2The Phillips CurveFigure 15-4© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1528Price LevelReal domestic outputoPL0PL1PL2PL3Q0Q1Q2Q3AD0AD1AD2AD3ASThe Phillips CurveFigure 15-4© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1529Price LevelReal domestic output765432101 2 3 4 5 6 7as inflation increases.... unemployment decreasesUnemployment rate (per cent)Annual rate of inflation(percent)The Phillips Curve© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1530Figure 15-5© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 15311960s data seemed to confirm the Phillips Curve relationshipThe Phillips CurveModern economists reject the idea of a stable predictable Phillips CurveThere is a short-run tradeoff between inflation & unemploymentAdverse Supply ShocksIn the late 1970s and early 1980s, the economy experienced stagflationAggregateSupplyShocks© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1534Aggregate Supply ShocksoPL1Q2ADAS1AS2Q1PL2© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1535Price LevelReal domestic outputAggregate Supply ShocksOPEC and Energy PricesOther shocks:agricultural shortfallsdollar depreciationwage increases after wage-price controls lifteddeclining productivityAnnual rate of inflation(percent)765432101 2 3 4 5 6 7Shifting Phillips Curve?PC1PC2Unemployment rate (per cent)© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1537Stagflation’s Demiseby the late ’80s, it appeared the Phillips curve had shifted backrecession of 81-83increased foreign competitionderegulation of airlines and truckingdecline in OPEC’s powerThe Long-Run Phillips CurveThere is no apparent long-run tradeoff between inflation & unemploymentAnnual rate of inflation(percent) 3 4 5 6PC1a1PCLRUnemployment rate (per cent)03691215The Long-Run Phillips Curve© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1540Figure 15-7economy is at a1 with unemployment at 5%, and inflation at 3%; suppose wages are set on the assumption of 3% inflationAnnual rate of inflation(percent) 3 4 5 6PC1a1PCLRUnemployment rate (per cent)03691215The Long-Run Phillips Curve© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1541Figure 15-7suppose AD increases & inflation increases to 6%; economy moves to b1b1Annual rate of inflation(percent) 3 4 5 6PC1a1PCLRUnemployment rate (per cent)03691215The Long-Run Phillips Curve© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1542Figure 15-7but b1 is not a stable equilibrium; workers will demand higher wages; economy moves to a2b1a2Annual rate of inflation(percent) 3 4 5 6PC1a1PCLRUnemployment rate (per cent)03691215The Long-Run Phillips Curve© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1543Figure 15-7Phillips Curve shifts upward from PC1 to PC2b1a2PC2Annual rate of inflation(percent) 3 4 5 6PC1a1PCLRUnemployment rate (per cent)03691215The Long-Run Phillips Curve© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1544Figure 15-7scenario repeats if AD increases againb1a2PC2b2a3PC3so any rate of inflation is possible with the 5% natural rate of unemploymentAnnual rate of inflation(percent) 3 4 5 6PC1a1PCLRUnemployment rate (per cent)03691215The Long-Run Phillips Curve© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1545Figure 15-7b1a2PC2b2a3PC3the long-run Phillips Curve is vertical at the 5% natural rate of unemploymentAnnual rate of inflation(percent) 3 4 5 6PCLRUnemployment rate (per cent)a3PC303691215c3The Long-Run Phillips Curve© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1546Figure 15-7what about disinflation?suppose the economy is at a3 & AD declinesAnnual rate of inflation(percent) 3 4 5 6PCLRUnemployment rate (per cent)a3PC303691215c3The Long-Run Phillips Curve© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1547Figure 15-7firms & workers eventually adjust to lower 6% inflationPC2a2Annual rate of inflation(percent) 3 4 5 6PCLRUnemployment rate (per cent)a3PC303691215c3The Long-Run Phillips Curve© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1548Figure 15-7if AD falls further, the scenario will continuePC2a2c2PC1a1Chapter 15 TopicsApplying the Long-Run AD-AS ModelThe Inflation-Unemployment RelationshipTaxation & Aggregate SupplyTaxation & Aggregate SupplyGovernment policies can impede or promote rightward shifts of ASPrice LevelReal domestic outputoPL2Q1ADAS2AS1Q2PL1Supply-Side Economics© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1551unemployment & inflation are both reducedTaxation & Aggregate SupplySupply-siders argue that high marginal tax rates are impeding productivity growthTaxes & Incentives to WorkIncentives to Save & InvestThe Laffer CurveIt is possible that reductions in marginal tax rates will increase AS but leave tax revenues unchangedillustratedLaffer CurveTax revenue (dollars)0100Shows impact of tax ratesupon tax collectionsTax rate (percent)© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1554Figure 15-8Laffer CurveTax revenue (dollars)0100Tax rate (percent)lincrease tax rates and tax revenues increase© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1555Figure 15-8Laffer CurveTax revenue (dollars)0100mmTax rate (percent)ltax revenues increase at a decreasing rate as rates rise further© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1556Figure 15-8Laffer CurveTax revenue (dollars)0100mmTax rate (percent)nlat some point, rates are so high that economic activity decreases, and cheating increases© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1557Figure 15-8Laffer CurveTax revenue (dollars)0100mmTax rate (percent)nl© 2002 McGraw-Hill Ryerson Ltd.Macroeconomics, Chapter 1558Figure 15-8Criticisms of the Laffer CurveTaxes, Incentives and Timesubstitution effect as well as income effectInflationdemand side effects may be greater/quickerPosition on Curvewhere are we?Chapter 15 TopicsApplying the Long-Run AD-AS ModelThe Inflation-Unemployment RelationshipTaxation & Aggregate Supply