Copyright 2008 The McGraw-Hill Companies 15-1 From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show 15 Extending the Analysis of Aggregate Supply

Copyright 2008 The McGraw-Hill Companies 15-2 From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show Chapter Objectives The Relationship Between Short-Run Aggregate Supply and Long-Run Aggregate Supply Applying the Extended AD-AS Model to Inflation, Recessions, and Unemployment The Short-Run Tradeoff Between Inflation and Unemployment (Phillips Curve) Why There is No Long-Run Tradeoff Between Inflation and Unemployment Relationship Between Tax Rates, Tax Revenues, and Aggregate Supply

Copyright 2008 The McGraw-Hill Companies 15-3 From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show From Short Run To Long Run Short Run Long Run Short-Run Aggregate Supply Long-Run Aggregate Supply Graphically

Copyright 2008 The McGraw-Hill Companies 15-4 From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show From Short Run To Long Run QfQf Q2Q2 Q3Q3 P3P3 P1P1 P2P2 P3P3 P1P1 P2P2 AS 1 Real Domestic Output QfQf Short-Run Aggregate Supply Long-Run Aggregate Supply a1a1 a2a2 a3a3 a1a1 a2a2 a3a3 b1b1 c1c1 Price Level AS 3 AS 2 AS 1 AS LR

Copyright 2008 The McGraw-Hill Companies 15-5 From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show From Short Run To Long Run Real Domestic Output Equilibrium in the Extended AD-AS Model Price Level P1P1 QfQf a AS 1 AS LR AD 1 G 15.1

Copyright 2008 The McGraw-Hill Companies 15-6 From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show From Short Run To Long Run Real Domestic Output Demand-Pull Inflation in the Extended AD-AS Model Price Level P1P1 QfQf a AS 1 AS LR AD 1 AD 2 AS 2 b c P2P2 P3P3

Copyright 2008 The McGraw-Hill Companies 15-7 From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show From Short Run To Long Run Real Domestic Output Cost-Push Inflation in the Extended AD-AS Model Price Level P1P1 QfQf a AS 1 AS LR AD 1 AD 2 AS 2 b c P2P2 P3P3 If Government Counters Recession With Spending… If Government Ignores Recession…

Copyright 2008 The McGraw-Hill Companies 15-8 From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show From Short Run To Long Run Real Domestic Output Recession in the Extended AD-AS Model Price Level P1P1 QfQf a AS 1 AS LR AD 1 AD 2 AS 2 b c P2P2 P3P3 Q1Q1

Copyright 2008 The McGraw-Hill Companies 15-9 From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show The Inflation-Unemployment Relationship The Short-Run Effect of Changes on Real Output and the Price Level Real Domestic Output Price Level 0 P0P0 P1P1 P2P2 P3P3 Q0Q0 Q1Q1 Q2Q2 Q3Q3 AD 0 AD 1 AD 2 AD 3 AS

Copyright 2008 The McGraw-Hill Companies From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show Unemployment Rate (Percent) Annual Rate of Inflation (Percent) Unemployment Rate (Percent) The Inflation-Unemployment Relationship The Phillips Curve –Inverse Relationship –Inflation and Unemployment ConceptEmpirical Data Data for the 1960s O 15.1

Copyright 2008 The McGraw-Hill Companies From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show The Inflation-Unemployment Relationship Adverse Supply Shocks and the Phillips Curve –Stagflation Adverse Aggregate Supply Shocks –OPEC Oil Price Shock –Stagflation’s Demise

Copyright 2008 The McGraw-Hill Companies From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show The Inflation-Unemployment Relationship Long-Run Phillips Curve Short-Run Phillips Curve Long-Run Vertical Phillips Curve Disinflation O 15.2

Copyright 2008 The McGraw-Hill Companies From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show The Inflation-Unemployment Relationship The Long-Run Vertical Phillips Curve Annual Rate of Inflation (Percent) Unemployment Rate (Percent) PC LR PC 3 PC 2 PC 1 a1a1 b1b1 a2a2 a3a3 b2b2 b3b3 c3c3 c2c2

Copyright 2008 The McGraw-Hill Companies From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show Taxation and Aggregate Supply Supply-Side Economics Tax Incentives to Work Tax Incentives to Save and Invest The Laffer Curve Tax Rate (Percent) Tax Revenue (Dollars) 100 m 0 n l m Laffer Curve Maximum Tax Revenue

Copyright 2008 The McGraw-Hill Companies From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show Taxation and Aggregate Supply Criticisms of The Laffer Curve –Taxes, Incentives, and Time –Inflation and Higher Real Interest Rates –Position on the Curve Rebuttal and Evaluation

Copyright 2008 The McGraw-Hill Companies From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show Tax Cuts for Whom? 10 People Have Breakfast Together for $100 Charges are Divided in the Way Americans Pay Taxes 4 Poorest Pay Nothing, Fifth Pays $1, Sixth Pays $3, Seventh Pays $7, Eighth Pays $12, Ninth Pays $18, Tenth the Richest Pays $59 Works Fine Until Price is Cut by $20 – How to Divide the Cut? Last Word A Supply-Side Anecdote

Copyright 2008 The McGraw-Hill Companies From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show Tax Cuts for Whom? $20 Divided by 6 = $3.33 Resulting in Fifth and Sixth Being Paid to Eat Breakfast Cook Suggests Dividing Proportionate to Price Paid by Each Results in First 5 Paying Nothing, Sixth $2, Seventh $5, Eighth $9, Ninth $12, and Tenth Pays $52 Each of the Paying 6 are Better Off Than Before Last Word A Supply-Side Anecdote

Copyright 2008 The McGraw-Hill Companies From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show Tax Cuts for Whom? Conflict Erupts Over Who Got How Much Relief – The Majority Going to the Richest When Confronted the Richest Diner Didn’t Come the Next Day. Surprise – They were $52 Short Without the Richest Payer Last Word A Supply-Side Anecdote

Copyright 2008 The McGraw-Hill Companies From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show Tax Cuts for Whom? Morals: People Who Pay the Most Taxes Reap the Most Benefit From Tax Cuts Redistributing Tax Reductions at the Expense of those Paying the Highest Taxes May Produce Unintended Consequences! Last Word A Supply-Side Anecdote

Copyright 2008 The McGraw-Hill Companies From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show Key Terms short run long run Phillips Curve stagflation aggregate supply shocks long-run vertical Phillips Curve disinflation supply-side economics Laffer Curve

Copyright 2008 The McGraw-Hill Companies From Short- Run to Long- Run Extended AD- AS Model The Inflation- Unemployment Relationship Phillips Curve Taxation and Aggregate Supply The Laffer Curve Last Word Key Terms End Show Next Chapter Preview… Economic Growth