1. Chapter Twenty- Eight: Aggregate Supply, Aggregate Demand, and Inflation: Putting it All Together

2. Aggregate Demand and Inflation

3. Output (Y ) Inflation rate (π ) Aggregate Demand (AD) If inflation rises… …the level of Aggregate Demand falls Y1Y1 π1π1 π0π0 Y0Y0 A B Figure 28.1: The Aggregate Demand Curve

4. Output (Y ) Inflation rate (π ) AD 0 AD 1 Figure 28.2: The Effect of Expansionary Fiscal Policy or Increased Confidence on the AD Curve

5. Aggregate Demand and Inflation

6. Output (Y ) Inflation rate (π ) Aggregate Supply (AS) Maximum Capacity Y* Unemployment Wage- Price Spiral Figure 28.3: The Aggregate Supply Curve

7. Output (Y ) Inflation rate (π ) AS 0 AS 1 5 % - 3 % - Figure 28.4: The Effect of an Increase in Inflationary Expectations on the Aggregate Supply Curve

8. Output (Y ) Inflation rate (π ) AS 1 AS 0 Expansion of Maximum Capacity Figure 28.5: A Beneficial Supply Shock: Expansion of Output Capacity

9. Putting the AS/AD Model to Work

10. Output (Y ) Inflation rate (π ) AS Y* AD E0E0 Unemployment Figure 28.6: The Aggregate Demand and Supply Equilibrium in Recession

11. Output (Y ) Inflation rate (π ) AS Y* AD 1 AD 0 E1E1 E0E0 Unemployment Figure 28.7: Expansionary Fiscal Policy in Response to a Recession

12. Output (Y ) Inflation rate (π ) AS Y* AD 1 AD 0 E1E1 E0E0 Unemployment Figure 28.8: A Greater Expansion of Aggregate Demand

13. Output (Y ) Inflation rate (π ) AS Y* AD 1 AD 0 E1E1 E0E0 Wage- Price Spiral Figure 28.9: Excessively High Aggregate Demand Causes Inflation

14. 1963 1969 1968 1967 1966 1965 1964 Unemployment Rate (percent) Inflation (percent per year) Figure 28.10: The Phillips Curve in the 1960s

15. Output (Y ) Inflation rate (π ) AS 0 Y* AD 0 AD 1 E0E0 E1E1 AS 1 Figure 28.11: Contractionary Fiscal Policy and Rising Inflationary Expectations

16. Output (Y ) Inflation rate (π ) AS 0 AS 1 AD E1E1 E0E0 Lower Capacity Figure 28.12: The Effect of the Oil Price Shock of the 1970s

17. Output (Y ) Inflation rate (π ) Y* Unemployment AD 0 AD 1 E0E0 E1E1 AS 1 AS 0 Figure 28.13: The Effects of The Fed’s “Tight Money” Policies in the 1980s

18. 0 Figure 28.14: Unemployment Trends 1960-2012 (Percentage of Labor Force) Source: Bureau of Labor Statistics, http://bls.gov/cps/cpsaat01.pdf

19. Figure 28.15: Inflation Trends 1960-2012 Source: Bureau of Labor Statistics, ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

20. Output (Y ) Inflation rate (π ) AS 1 AS 0 AS 2 AD E0E0 E2E2 E1E1 Higher Capacity Figure 28.16: The Effects of Technological Innovation and Increased Efficiency

21. Competing Theories

22. Output (Y ) Inflation rate (π ) Classical AS Y* AD Figure 28.17: The Classical View of AS/AD

23. Output (Y ) Inflation rate (π ) Y* AE 1 AD 0 E1E1 E0E0 Classical ASR AS 1 AS 0 Figure 28.18: A New Classical View of Economic Fluctuations