The New-Keynesian Theory of Aggregate Supply Chapter 8
2 Introduction Great Depression -Classical Model -The neutrality of money -Vertical AS -New-Keynesian Model -Sticky Price -Upward Slopped AS
3 ©2002 South-Western College Publishing Figure 8.1A The Classical and New-Keynesian Theories of Aggregate Supply Compared
4 ©2002 South-Western College Publishing Figure 8.1B The Classical and New-Keynesian Theories of Aggregate Supply Compared
5 The Theory of Nominal Rigidity Two approaches: -The menu cost approach -The contract theory of wages Rigid nominal wages (This Chapter)
6 The Theory of Sticky Wages The new-Keynesian theory of AS begins with the efficiency wage model and adds to it, assuming that the nominal wage is chosen less frequently than employment. Employment contract The aggregate real wage may differ from the efficiency wage over long periods of time.
7 Unemployment and the Price Level when the Nominal Wage is Sticky
8 ©2002 South-Western College Publishing Figure 8.2A How Changes in the Price Level Affect Employment
9 ©2002 South-Western College Publishing Figure 8.2B How Changes in the Price Level Affect Employment
10 Aggregate Supply and the Price Level when the Nominal Wage is Sticky
11 ©2002 South-Western College Publishing Figure 8.3 The New-Keynesian Theory of Aggregate Supply
12 Okun’s Law Okun’s Law says that when unemployment increases by 1 percentage point, GDP will fall 3% below trend. See BOX 8.2
13 From the Short Run to the Long Run
14 ©2002 South-Western College Publishing Figure 8.4 Getting from the Short Run to the Long Run
15 The New-Keynesian Model and the Non-Neutrality of Money
16 Figure 8.5 The Non-Neutrality of Money in the Keynesian Model
17 Should We Stabilize the Business Cycle The Real Business Cycle School -Most recessions are generated by fluctuations in the natural rate and that the mechanism that restores equilibrium is very fast. Keynesians: -Some business cycles are not caused by changes in technology like the Great Depression.
18 Homework Question 4, 6, 7, 8
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