chapter 8 “a framework for macroeconomic analysis”

1 ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e

CHAPTER 8“A Framework for

Macroeconomic Analysis”

CHAPTER 8“A Framework for

Macroeconomic Analysis”

MACROECONOMICS: MACROECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge

MACROECONOMICS: MACROECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

1.1. Contrast the perspectives of classical Contrast the perspectives of classical economist to those of Keynesians.economist to those of Keynesians.

2.2. Describe how full-employment output Describe how full-employment output can change.can change.

3.3. Explain why the price level does not Explain why the price level does not matter in the long run.matter in the long run.

4.4. Interpret and apply the aggregate Interpret and apply the aggregate demand-aggregate supply model.demand-aggregate supply model.

1.1. Contrast the perspectives of classical Contrast the perspectives of classical economist to those of Keynesians.economist to those of Keynesians.

2.2. Describe how full-employment output Describe how full-employment output can change.can change.

3.3. Explain why the price level does not Explain why the price level does not matter in the long run.matter in the long run.

4.4. Interpret and apply the aggregate Interpret and apply the aggregate demand-aggregate supply model.demand-aggregate supply model.


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

5. 5. Relate the difference between demand-side Relate the difference between demand-side and supply-side inflation in the long run.and supply-side inflation in the long run.

6.6. (E&A) Interpret how the war against (E&A) Interpret how the war against terrorism can cause both inflation and lower terrorism can cause both inflation and lower output, and ways in which these effects might output, and ways in which these effects might be countered.be countered.

5. 5. Relate the difference between demand-side Relate the difference between demand-side and supply-side inflation in the long run.and supply-side inflation in the long run.

6.6. (E&A) Interpret how the war against (E&A) Interpret how the war against terrorism can cause both inflation and lower terrorism can cause both inflation and lower output, and ways in which these effects might output, and ways in which these effects might be countered.be countered.


8.18.1KEYNESIAN SHORT-RUN AND KEYNESIAN SHORT-RUN AND CLASSICAL LONG-RUN PERSPECTIVECLASSICAL LONG-RUN PERSPECTIVE

8.18.1KEYNESIAN SHORT-RUN AND KEYNESIAN SHORT-RUN AND CLASSICAL LONG-RUN PERSPECTIVECLASSICAL LONG-RUN PERSPECTIVE

When we answer macroeconomic questions When we answer macroeconomic questions about employment, output, and inflation we about employment, output, and inflation we must provide near term events with a long-run must provide near term events with a long-run perspective.perspective.

This context is called This context is called the long-runthe long-run, which , which involves underlying economic forces that make involves underlying economic forces that make themselves felt over time.themselves felt over time.

In contrast, In contrast, the short runthe short run represents more represents more immediate and transitory economic immediate and transitory economic developments.developments.

When we answer macroeconomic questions When we answer macroeconomic questions about employment, output, and inflation we about employment, output, and inflation we must provide near term events with a long-run must provide near term events with a long-run perspective.perspective.

This context is called This context is called the long-runthe long-run, which , which involves underlying economic forces that make involves underlying economic forces that make themselves felt over time.themselves felt over time.

In contrast, In contrast, the short runthe short run represents more represents more immediate and transitory economic immediate and transitory economic developments.developments.


John Maynard KeynesJohn Maynard KeynesJohn Maynard KeynesJohn Maynard Keynes

British economist who wrote British economist who wrote ““The General The General Theory of Employment, Interest and Money”Theory of Employment, Interest and Money” in 1936.in 1936.

Developed the emergence of macroeconomics Developed the emergence of macroeconomics as a field of analysis separate from as a field of analysis separate from microeconomics.microeconomics.

Offered a new short-run perspective that Offered a new short-run perspective that came to be known as Keynesian economics.came to be known as Keynesian economics.

British economist who wrote British economist who wrote ““The General The General Theory of Employment, Interest and Money”Theory of Employment, Interest and Money” in 1936.in 1936.

Developed the emergence of macroeconomics Developed the emergence of macroeconomics as a field of analysis separate from as a field of analysis separate from microeconomics.microeconomics.

Offered a new short-run perspective that Offered a new short-run perspective that came to be known as Keynesian economics.came to be known as Keynesian economics.


Macroeconomic theory can be placed Macroeconomic theory can be placed within two broad categories..within two broad categories..KeynesianKeynesian, which suggest that , which suggest that

government action is an appropriate government action is an appropriate response to short-run macroeconomic response to short-run macroeconomic problems;problems;

ClassicalClassical, which suggest that a steady , which suggest that a steady policy aimed at the long-run best allows policy aimed at the long-run best allows the economy to take care of itself.the economy to take care of itself.

Macroeconomic theory can be placed Macroeconomic theory can be placed within two broad categories..within two broad categories..KeynesianKeynesian, which suggest that , which suggest that

government action is an appropriate government action is an appropriate response to short-run macroeconomic response to short-run macroeconomic problems;problems;

ClassicalClassical, which suggest that a steady , which suggest that a steady policy aimed at the long-run best allows policy aimed at the long-run best allows the economy to take care of itself.the economy to take care of itself.

Keynesian Short-Run and Classical Keynesian Short-Run and Classical Long-Run PerspectivesLong-Run Perspectives

Keynesian Short-Run and Classical Keynesian Short-Run and Classical Long-Run PerspectivesLong-Run Perspectives


The Phillips CurveThe Phillips CurveThe Phillips CurveThe Phillips Curve

The The Phillips curvePhillips curve is a graphical is a graphical representation of data that depicted a representation of data that depicted a distinct curvilinear tradeoff between low distinct curvilinear tradeoff between low unemployment and low inflation during unemployment and low inflation during the 1960’s.the 1960’s.

Data past the decade of the 1960’s shows Data past the decade of the 1960’s shows no systematic relationship between no systematic relationship between unemployment and inflation.unemployment and inflation.

The The Phillips curvePhillips curve is a graphical is a graphical representation of data that depicted a representation of data that depicted a distinct curvilinear tradeoff between low distinct curvilinear tradeoff between low unemployment and low inflation during unemployment and low inflation during the 1960’s.the 1960’s.

Data past the decade of the 1960’s shows Data past the decade of the 1960’s shows no systematic relationship between no systematic relationship between unemployment and inflation.unemployment and inflation.


The Phillips CurveThe Phillips CurveThe Phillips CurveThe Phillips Curve

Unemployment RateUnemployment Rate

Infl

atio

n R

ate

Infl

atio

n R

ate

Phillips CurvePhillips Curve


Rational ExpectationsRational ExpectationsRational ExpectationsRational Expectations

In the modern world, people are more likely to In the modern world, people are more likely to have have rational expectationsrational expectations in which they can in which they can predict the implications of government policy predict the implications of government policy action and thus cannot be systematically tricked.action and thus cannot be systematically tricked.

With rational expectations, we keep up with the With rational expectations, we keep up with the news analyses and base our expectations on the news analyses and base our expectations on the best information available to us.best information available to us.The idea of rational expectations provides The idea of rational expectations provides support to classical arguments that the support to classical arguments that the government should step back and let the government should step back and let the macroeconomy take care of itself.macroeconomy take care of itself.

In the modern world, people are more likely to In the modern world, people are more likely to have have rational expectationsrational expectations in which they can in which they can predict the implications of government policy predict the implications of government policy action and thus cannot be systematically tricked.action and thus cannot be systematically tricked.

With rational expectations, we keep up with the With rational expectations, we keep up with the news analyses and base our expectations on the news analyses and base our expectations on the best information available to us.best information available to us.The idea of rational expectations provides The idea of rational expectations provides support to classical arguments that the support to classical arguments that the government should step back and let the government should step back and let the macroeconomy take care of itself.macroeconomy take care of itself.


8.28.2MODELING THE LONG RUNMODELING THE LONG RUN8.28.2MODELING THE LONG RUNMODELING THE LONG RUN

A fundamental macroeconomic goal is is to A fundamental macroeconomic goal is is to obtain obtain full-employment outputfull-employment output, also termed , also termed full-employment GDPfull-employment GDP..

The existence of a natural rate of The existence of a natural rate of unemployment implies that the long-run unemployment implies that the long-run tendency is towards full-employment GDP.tendency is towards full-employment GDP.

Actual real GDP in the U.S. has generally Actual real GDP in the U.S. has generally been close to the full-employment potential.been close to the full-employment potential.

A fundamental macroeconomic goal is is to A fundamental macroeconomic goal is is to obtain obtain full-employment outputfull-employment output, also termed , also termed full-employment GDPfull-employment GDP..

The existence of a natural rate of The existence of a natural rate of unemployment implies that the long-run unemployment implies that the long-run tendency is towards full-employment GDP.tendency is towards full-employment GDP.

Actual real GDP in the U.S. has generally Actual real GDP in the U.S. has generally been close to the full-employment potential.been close to the full-employment potential.


Long-Run Aggregate SupplyLong-Run Aggregate SupplyLong-Run Aggregate SupplyLong-Run Aggregate Supply

The economy supplies full employment output in the The economy supplies full employment output in the long run, no matter the price level.long run, no matter the price level.

Because the price level is irrelevant to the potential Because the price level is irrelevant to the potential for full-employment output, for full-employment output, long-run aggregate long-run aggregate supplysupply is always vertical. is always vertical.

The desire of people to receive income pushes The desire of people to receive income pushes unemployment down toward its natural rate which unemployment down toward its natural rate which leads to full employment output in the long run.leads to full employment output in the long run.

The economy supplies full employment output in the The economy supplies full employment output in the long run, no matter the price level.long run, no matter the price level.

Because the price level is irrelevant to the potential Because the price level is irrelevant to the potential for full-employment output, for full-employment output, long-run aggregate long-run aggregate supplysupply is always vertical. is always vertical.

The desire of people to receive income pushes The desire of people to receive income pushes unemployment down toward its natural rate which unemployment down toward its natural rate which leads to full employment output in the long run.leads to full employment output in the long run.



Real GDPReal GDP

Pri

ce L

evel

Pri

ce L

evel Long-Run Long-Run

Aggregate SupplyAggregate Supply

Starting Full-Starting Full-Employment GDPEmployment GDP

Full-Employment Full-Employment GDP would fallGDP would fall

The effect of fewerThe effect of fewerresources or poorerresources or poorertechnology.technology.

The effect of fewerThe effect of fewerresources or poorerresources or poorertechnology.technology.


Real GDPReal GDP

Pri

ce L

evel

Pri

ce L

evel

Full-Employment Full-Employment GDP would riseGDP would rise

Starting Full-Starting Full-Employment GDPEmployment GDP

The effect of moreThe effect of moreresources or betterresources or bettertechnology.technology.

The effect of moreThe effect of moreresources or betterresources or bettertechnology.technology.

Long-Run Long-Run Aggregate SupplyAggregate Supply



Aggregate DemandAggregate DemandAggregate DemandAggregate Demand

Aggregate demand relates how much Aggregate demand relates how much real GDP consumers, businesses, and real GDP consumers, businesses, and government will purchase at each price government will purchase at each price level.level.Aggregate demand has a downward Aggregate demand has a downward slope.slope.

Aggregate demand relates how much Aggregate demand relates how much real GDP consumers, businesses, and real GDP consumers, businesses, and government will purchase at each price government will purchase at each price level.level.Aggregate demand has a downward Aggregate demand has a downward slope.slope.



Real GDP

Pri

ce L

evel

Aggregate Demand

Aggregate demand slopes downward because: 1) consumers get more goods and services for each dollar they spend and, 2) consumers spend more money out of their current incomes because the lower price level increases the value of their savings.



Price level decreasesPrice level decreases

Aggregate purchases increaseAggregate purchases increase

Price level increasesPrice level increases

Aggregate purchases decreaseAggregate purchases decrease


Purchasing power effect:Purchasing power effect: A lower price level A lower price level allows consumers to receive more goods and allows consumers to receive more goods and services for any given number of dollars they services for any given number of dollars they spend.spend.

Wealth effect:Wealth effect: A lower price level causes A lower price level causes consumers to spend more money out of their consumers to spend more money out of their current incomes because the lower price level current incomes because the lower price level increases the value of the money they have increases the value of the money they have saved.saved.

These two effects combined explain the inverse These two effects combined explain the inverse relationship between the price level and the relationship between the price level and the quantity of GDP Demanded.quantity of GDP Demanded.

Purchasing power effect:Purchasing power effect: A lower price level A lower price level allows consumers to receive more goods and allows consumers to receive more goods and services for any given number of dollars they services for any given number of dollars they spend.spend.

Wealth effect:Wealth effect: A lower price level causes A lower price level causes consumers to spend more money out of their consumers to spend more money out of their current incomes because the lower price level current incomes because the lower price level increases the value of the money they have increases the value of the money they have saved.saved.

These two effects combined explain the inverse These two effects combined explain the inverse relationship between the price level and the relationship between the price level and the quantity of GDP Demanded.quantity of GDP Demanded.



Long-Run Macro EquilibriumLong-Run Macro EquilibriumLong-Run Macro EquilibriumLong-Run Macro Equilibrium

Real GDP

Pri

ce L

evel

Long-Run Aggregate Supply

Full-Employment GDP

Aggregate Demand

GDP with Overheating

GDP with Unemployment

Full-employment price level

Too low

Too high

A


8.38.3ROOT CAUSES OF INFALTIONROOT CAUSES OF INFALTION8.38.3ROOT CAUSES OF INFALTIONROOT CAUSES OF INFALTION

Demand-pull inflation:Demand-pull inflation: When a rightward When a rightward shift in aggregate demand moves the shift in aggregate demand moves the economy to both a higher output and a economy to both a higher output and a higher price level.higher price level.

Cost-push inflation:Cost-push inflation: When firms adjust When firms adjust their inflationary expectations downward, their inflationary expectations downward, it may cause the economy to move up the it may cause the economy to move up the aggregate demand curve to a point with aggregate demand curve to a point with higher prices and lower output.higher prices and lower output.

Demand-pull inflation:Demand-pull inflation: When a rightward When a rightward shift in aggregate demand moves the shift in aggregate demand moves the economy to both a higher output and a economy to both a higher output and a higher price level.higher price level.

Cost-push inflation:Cost-push inflation: When firms adjust When firms adjust their inflationary expectations downward, their inflationary expectations downward, it may cause the economy to move up the it may cause the economy to move up the aggregate demand curve to a point with aggregate demand curve to a point with higher prices and lower output.higher prices and lower output.


Demand Side InflationDemand Side Inflation

Real GDP

Pri

ce L

evel Long-Run

Aggregate Supply

Full-Employment GDP

Aggregate Demand

Demand side Demand side inflationinflation

Starting Equilibrium

NewEquilibrium


Demand Side InflationDemand Side Inflation

Real GDP

Pri

ce L

evel Long-Run

Aggregate Supply

Full-Employment GDP

Aggregate DemandDemand side Demand side inflationinflation

NewEquilibrium

StartingEquilibrium


Supply Side Inflation and Supply Side Inflation and DeflationDeflation

Supply Side Inflation and Supply Side Inflation and DeflationDeflation

Changes on the supply side can also cause Changes on the supply side can also cause either inflation or deflation.either inflation or deflation.

If long-run aggregate supply were to shift to If long-run aggregate supply were to shift to the left, we would see the left, we would see supply side inflationsupply side inflation in in which the same amount of spending is able to which the same amount of spending is able to buy fewer goods at higher prices.buy fewer goods at higher prices.

Full employment GDP decreases as long-run Full employment GDP decreases as long-run aggregate supply shifts to the left.aggregate supply shifts to the left.

Changes on the supply side can also cause Changes on the supply side can also cause either inflation or deflation.either inflation or deflation.

If long-run aggregate supply were to shift to If long-run aggregate supply were to shift to the left, we would see the left, we would see supply side inflationsupply side inflation in in which the same amount of spending is able to which the same amount of spending is able to buy fewer goods at higher prices.buy fewer goods at higher prices.

Full employment GDP decreases as long-run Full employment GDP decreases as long-run aggregate supply shifts to the left.aggregate supply shifts to the left.


Long-run cost-push inflationLong-run cost-push inflation

Real GDP

Pri

ce L

evel


Full-Employment GDP

Aggregate Demand

Supply Side Inflation

Cost-push inflation can arise from changes in employment practices that lead to higher real production costs.


Long-run cost-push inflationLong-run cost-push inflation

Real GDP

Pri

ce L

evel

Full-Employment GDP

Aggregate Demand

Supply Side deflation New equilibriumNew equilibrium



8.48.4CLASSICAL VERSUS KEYNESIANCLASSICAL VERSUS KEYNESIAN8.48.4CLASSICAL VERSUS KEYNESIANCLASSICAL VERSUS KEYNESIAN

Economic analysis influences people’s politics.

Political Liberals often side with the Keynesian perspective which supports large government.

Political conservatives side with the Classical analysis which supports the more laissez faire approach.

Economic analysis influences people’s politics.

Political Liberals often side with the Keynesian perspective which supports large government.

Political conservatives side with the Classical analysis which supports the more laissez faire approach.


8.5 EXPLORE & APPLY8.5 EXPLORE & APPLYFighting Terrorism8.5 EXPLORE & APPLY8.5 EXPLORE & APPLYFighting Terrorism

As a result of the terrorist attack of 9/11/01, As a result of the terrorist attack of 9/11/01, added security measures were imposed added security measures were imposed throughout the economy.throughout the economy.This meant that it was more expensive to do This meant that it was more expensive to do

business.business.The security industry prospered, as demand The security industry prospered, as demand

and prices went up in that line of work.and prices went up in that line of work.Numerous other industries suffered as they Numerous other industries suffered as they

faced higher cost of production and slower faced higher cost of production and slower deliveries of raw materials.deliveries of raw materials.

As a result of the terrorist attack of 9/11/01, As a result of the terrorist attack of 9/11/01, added security measures were imposed added security measures were imposed throughout the economy.throughout the economy.This meant that it was more expensive to do This meant that it was more expensive to do

business.business.The security industry prospered, as demand The security industry prospered, as demand

and prices went up in that line of work.and prices went up in that line of work.Numerous other industries suffered as they Numerous other industries suffered as they

faced higher cost of production and slower faced higher cost of production and slower deliveries of raw materials.deliveries of raw materials.


Real GDP

Pri

ce L

evel


Full-Employment GDP

Aggregate Demand

Price level

rises

Fighting TerrorismFighting TerrorismFighting TerrorismFighting Terrorism

1.1. Higher securityHigher securitycost shift LRAS left.cost shift LRAS left.

2. The result is a 2. The result is a change in the full change in the full employment employment equilibriumequilibrium


This shift can be moderated or even This shift can be moderated or even offset by advances in technology.offset by advances in technology.

To the extent that advances in To the extent that advances in monitoring cameras and scanning monitoring cameras and scanning cameras can reduce the need for security cameras can reduce the need for security personnel, the effect is to increase full-personnel, the effect is to increase full-employment output, and shift AS to the employment output, and shift AS to the right.right.

This shift can be moderated or even This shift can be moderated or even offset by advances in technology.offset by advances in technology.

To the extent that advances in To the extent that advances in monitoring cameras and scanning monitoring cameras and scanning cameras can reduce the need for security cameras can reduce the need for security personnel, the effect is to increase full-personnel, the effect is to increase full-employment output, and shift AS to the employment output, and shift AS to the right.right.



The 2001 terrorist attacks had a The 2001 terrorist attacks had a significant effect on the demand side of significant effect on the demand side of the economy.the economy.The shock and uncertainty caused business The shock and uncertainty caused business

to postpone new investment, and consumers to postpone new investment, and consumers to postpone new purchases.to postpone new purchases.

The result was a leftward shift in aggregate The result was a leftward shift in aggregate demand.demand.

The 2001 terrorist attacks had a The 2001 terrorist attacks had a significant effect on the demand side of significant effect on the demand side of the economy.the economy.The shock and uncertainty caused business The shock and uncertainty caused business

to postpone new investment, and consumers to postpone new investment, and consumers to postpone new purchases.to postpone new purchases.

The result was a leftward shift in aggregate The result was a leftward shift in aggregate demand.demand.



Real GDP

Pri

ce L

evel Long-Run

Aggregate Supply

Full-Employment GDP

Aggregate Demand


First output and employment drop.

Price level Price level fallsfalls

Second, the pricelevel falls

The long runEquilibrium moves lower


o The question after the attacks was how The question after the attacks was how long would it take for consumers to long would it take for consumers to resume their former spending patterns.resume their former spending patterns.o The government took action by The government took action by

spending additional money to combat spending additional money to combat the terrorist.the terrorist.

o Government also lowered borrowing Government also lowered borrowing cost, and increased the money supplycost, and increased the money supply

o The question after the attacks was how The question after the attacks was how long would it take for consumers to long would it take for consumers to resume their former spending patterns.resume their former spending patterns.o The government took action by The government took action by

spending additional money to combat spending additional money to combat the terrorist.the terrorist.

o Government also lowered borrowing Government also lowered borrowing cost, and increased the money supplycost, and increased the money supply



Terms along the WayTerms along the WayTerms along the WayTerms along the Way

long runlong run short runshort run KeynesianKeynesian ClassicalClassical the Phillips Curvethe Phillips Curve inflationary inflationary

expectationsexpectations

long runlong run short runshort run KeynesianKeynesian ClassicalClassical the Phillips Curvethe Phillips Curve inflationary inflationary

expectationsexpectations

adaptive expectationsadaptive expectations stagflation stagflation rational expectationsrational expectations full-employment full-employment

outputoutput long-run aggregate long-run aggregate

supplysupply aggregate demandaggregate demand

adaptive expectationsadaptive expectations stagflation stagflation rational expectationsrational expectations full-employment full-employment

outputoutput long-run aggregate long-run aggregate

supplysupply aggregate demandaggregate demand


Terms along the WayTerms along the WayTerms along the WayTerms along the Way

purchasing power purchasing power effecteffect

wealth effectwealth effect full-employment full-employment

outputoutput demand-side demand-side

inflation inflation

purchasing power purchasing power effecteffect

wealth effectwealth effect full-employment full-employment

outputoutput demand-side demand-side

inflation inflation

supply-side inflationsupply-side inflation supply shocksupply shock real business cyclereal business cycle supply side deflationsupply side deflation

supply-side inflationsupply-side inflation supply shocksupply shock real business cyclereal business cycle supply side deflationsupply side deflation


Test YourselfTest YourselfTest YourselfTest Yourself

1.1. Full-employment GDP Full-employment GDP

a.a. must be equal to actual GDP.must be equal to actual GDP.

b.b. must be less than actual GDP.must be less than actual GDP.

c.c. must be greater than actual GDP.must be greater than actual GDP.

d.d. could be equal to, greater than, or even could be equal to, greater than, or even less than actual GDP.less than actual GDP.

1.1. Full-employment GDP Full-employment GDP

a.a. must be equal to actual GDP.must be equal to actual GDP.

b.b. must be less than actual GDP.must be less than actual GDP.

c.c. must be greater than actual GDP.must be greater than actual GDP.

d.d. could be equal to, greater than, or even could be equal to, greater than, or even less than actual GDP.less than actual GDP.



2.2. Because of the desire of people to have an Because of the desire of people to have an income, the long-run tendency of the economy is income, the long-run tendency of the economy is to to

a.a. move up and down with the business cycle.move up and down with the business cycle.

b.b. produce the full employment level of output.produce the full employment level of output.

c.c. behave in unpredictable ways.behave in unpredictable ways.

d.d. exhibit stable prices.exhibit stable prices.

2.2. Because of the desire of people to have an Because of the desire of people to have an income, the long-run tendency of the economy is income, the long-run tendency of the economy is to to

a.a. move up and down with the business cycle.move up and down with the business cycle.

b.b. produce the full employment level of output.produce the full employment level of output.

c.c. behave in unpredictable ways.behave in unpredictable ways.

d.d. exhibit stable prices.exhibit stable prices.



3.3. “In the long-run we are all dead” is a “In the long-run we are all dead” is a statement that best expressesstatement that best expresses

a.a. Keynesian economics.Keynesian economics.b.b. Classical economics.Classical economics.c.c. both Keynesian and Classical both Keynesian and Classical

economics.economics.d.d. neither Keynesian nor Classical neither Keynesian nor Classical

economicseconomics

3.3. “In the long-run we are all dead” is a “In the long-run we are all dead” is a statement that best expressesstatement that best expresses

a.a. Keynesian economics.Keynesian economics.b.b. Classical economics.Classical economics.c.c. both Keynesian and Classical both Keynesian and Classical

economics.economics.d.d. neither Keynesian nor Classical neither Keynesian nor Classical

economicseconomics



4.4. The Phillips curve shows an inverse The Phillips curve shows an inverse relationship between ______________ relationship between ______________ and _________.and _________.

a.a. inflation; unemploymentinflation; unemploymentb.b. GDP; price levelGDP; price levelc.c. supply-side inflation; demand side supply-side inflation; demand side

inflationinflationd.d. aggregate demand; aggregate supply.aggregate demand; aggregate supply.

4.4. The Phillips curve shows an inverse The Phillips curve shows an inverse relationship between ______________ relationship between ______________ and _________.and _________.

a.a. inflation; unemploymentinflation; unemploymentb.b. GDP; price levelGDP; price levelc.c. supply-side inflation; demand side supply-side inflation; demand side

inflationinflationd.d. aggregate demand; aggregate supply.aggregate demand; aggregate supply.



5.5. A graph of long-run aggregate supply A graph of long-run aggregate supply would show the curve to be would show the curve to be

a.a. upward sloping to the right.upward sloping to the right.

b.b. downward sloping to the right.downward sloping to the right.

c.c. vertical.vertical.

d.d. horizontal.horizontal.

5.5. A graph of long-run aggregate supply A graph of long-run aggregate supply would show the curve to be would show the curve to be







6.6. The aggregate demand curve is ?The aggregate demand curve is ?





6.6. The aggregate demand curve is ?The aggregate demand curve is ?






The End!The End!Next Chapter 9Next Chapter 9

““Inflation"Inflation"

chapter 8 “a framework for macroeconomic analysis”

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