Aggregate Supply and the Short-run Tradeoff between Inflation and Unemployment

The Basic Theory of Aggregate Supply
There are two prominent models of aggregate supply. In both models, some market imperfection causes the output of the economy to deviate from its natural level. As a result, the short-run aggregate supply curve is upward sloping rather than vertical, and shifts in the aggregate demand curve cause output to fluctuate. These temporary deviations of output from its natural level represent the booms and busts of business cycle
-The Sticky-Price model
The model emphasizes that firms do not instantly adjust the prices they charge in response to changes in demand. There are various ways to formalize the idea of sticky prices, the simplest one is first, consider the pricing decisions of individual firms and then add together the decisions of many firms to explain the behavior of the economy as a whole.
-The Imperfect-Information Model
Contrary from the precious model, this model prices are free to adjust to balance supply and demand. This models happen because of imperfect information of prices.

Inflation, Unemployment, and the Phillip Curve
Phillip curves implies that inflation depends on: expected inflation, the deviation of unemployment from its natural rate, and supply shock. According to the Phillips curve equation, unemployment is related to unexpected movements in the inflation rate.
The Short-Run Tradeoff between Inflation and Unemployment
By changing aggregate demand, the policymaker can alter output, unemployment, and inflation. The policymaker can expand aggregate demand to lower unemployment and raise inflation. Or the policymaker can depress aggregate demand to raise unemployment and lower inflation.



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