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Tradeoff between inflation and unemployment
According to the three theories of aggregate supply they can have an upward-sloping SRAS curve, a vertical LRAS curve and the actual level of output is equal to its natural level in the long run.
These models are:
Aggregate supply equation:
Y = Y + α(P - Pe)
- Y is output
- Y is the natural level of output
- P is the price level
- Pe is the expected price level.
Output will be at its natural level when the actual price is equal to the expected price level.
Graphing is easier if we isolate P:
P = Pe + (1 / α ) ( Y - Y)
- An increase in the expected price level will shift the aggregate supply curve upward, to the left.
- An increase in the natural level of output will shift the aggregate supply curve downward (to the right).
- This graph shift downward to the right because the level of Y at which output will equal its natural level will increase.
The short-run aggregate supply curve will be horizontal if all firms in the economy have fixed prices.
The aggregate supply curve can also be expressed in a relationship called Phillips curve
Type of inflations:
 Tradeoff |
Asumptions
Hypothesis, theorems and terms
According to Macroeconomics by Gregory Mankiw
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