1. The New-Keynesian Theory of Aggregate Supply Chapter 8

2. 2 Introduction Great Depression -Classical Model -The neutrality of money -Vertical AS -New-Keynesian Model -Sticky Price -Upward Slopped AS

3. 3 ©2002 South-Western College Publishing Figure 8.1A The Classical and New-Keynesian Theories of Aggregate Supply Compared

4. 4 ©2002 South-Western College Publishing Figure 8.1B The Classical and New-Keynesian Theories of Aggregate Supply Compared

5. 5 The Theory of Nominal Rigidity Two approaches: -The menu cost approach -The contract theory of wages Rigid nominal wages (This Chapter)

6. 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. 7 Unemployment and the Price Level when the Nominal Wage is Sticky

8. 8 ©2002 South-Western College Publishing Figure 8.2A How Changes in the Price Level Affect Employment

9. 9 ©2002 South-Western College Publishing Figure 8.2B How Changes in the Price Level Affect Employment

10. 10 Aggregate Supply and the Price Level when the Nominal Wage is Sticky

11. 11 ©2002 South-Western College Publishing Figure 8.3 The New-Keynesian Theory of Aggregate Supply

12. 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. 13 From the Short Run to the Long Run

14. 14 ©2002 South-Western College Publishing Figure 8.4 Getting from the Short Run to the Long Run

15. 15 The New-Keynesian Model and the Non-Neutrality of Money

16. 16 Figure 8.5 The Non-Neutrality of Money in the Keynesian Model

17. 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. 18 Homework Question 4, 6, 7, 8

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