Worth: Mankiw Economics 5e CHAPTER THIRTEEN Aggregate Supply There is ahvays a temporary tradeoff befween inflation and unemploy from inflation per se, but from unanticipated inflation, which generally means, from a rising rate of inflation Milton friedman Most economists analyze short-run fluctuations in aggregate income and the price level using the model of aggregate demand and aggregate supply. In the IS-LM modek hapters, we examined aggregate demand in some detail. The IS-LM model-together with its open-economy cousin the Mundell-Fleming model-shows how changes in monetary and fiscal policy and shocks to the money and goods markets shift the aggregate demand curve. In this chapter, we turn our attention to aggregate supply and develop theories that explain the po- sition and slope of the aggregate supply curve. When we introduced the aggregate supply curve in Chapter 9, we established that aggregate supply behaves differently in the short run than in the long run. 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 affect the price level, but the output of the economy remains at its natural rate By con- trast, in the short run, prices are sticky, and the aggregate supply curve is not ver tical. In this case, shifts in aggregate demand do cause fluctuations in output. In Chapter 9 we took a simplified view of price stickiness by drawing the short-run aggregate supply curve as a horizontal line, representing the extreme situation in which all prices are fixed. Our task now is to refine this understanding of short- run aggregate supply Unfortunately, one fact makes this task more difficult: economists disagree about how best to explain aggregate supply. As a result, this chapter begins by presenting three prominent models of the short-run aggregate supply curve. Among economists, each of these models has some prominent adherents(as well as some prominent critics), and you can decide for yourself which you find most plausible. Although these models differ in some significant details, they are also elated in an important way: they share a common theme about what makes the User JoENA: Job EFFo1429: 6264_ch13: Pg 347: 25876#/eps at 100sl Mon,Feb18,200212:56User JOEWA:Job EFF01429:6264_ch13:Pg 347:25876#/eps at 100% *25876* Mon, Feb 18, 2002 12:56 AM Most economists analyze short-run fluctuations in aggregate income and the price level using the model of aggregate demand and aggregate supply. In the previous three chapters, we examined aggregate demand in some detail. The IS–LM model—together with its open-economy cousin the Mundell–Fleming model—shows how changes in monetary and fiscal policy and shocks to the money and goods markets shift the aggregate demand curve. In this chapter, we turn our attention to aggregate supply and develop theories that explain the po￾sition and slope of the aggregate supply curve. When we introduced the aggregate supply curve in Chapter 9, we established that aggregate supply behaves differently in the short run than in the long run. 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 affect the price level, but the output of the economy remains at its natural rate. By con￾trast, in the short run, prices are sticky, and the aggregate supply curve is not ver￾tical. In this case, shifts in aggregate demand do cause fluctuations in output. In Chapter 9 we took a simplified view of price stickiness by drawing the short-run aggregate supply curve as a horizontal line, representing the extreme situation in which all prices are fixed. Our task now is to refine this understanding of short￾run aggregate supply. Unfortunately, one fact makes this task more difficult: economists disagree about how best to explain aggregate supply. As a result, this chapter begins by presenting three prominent models of the short-run aggregate supply curve. Among economists, each of these models has some prominent adherents (as well as some prominent critics), and you can decide for yourself which you find most plausible. Although these models differ in some significant details, they are also related in an important way: they share a common theme about what makes the | 347 Aggregate Supply 13 CHAPTER There is always a temporary tradeoff between inflation and unemploy￾ment; there is no permanent tradeoff. The temporary tradeoff comes not from inflation per se, but from unanticipated inflation, which generally means, from a rising rate of inflation. — Milton Friedman THIRTEEN