 |  Macroeconomics, 9/e Campbell R. McConnell,
University of Nebraska, Lincoln
Stanley L. Brue,
Pacific Lutheran University
Thomas P. Barbiero,
Ryerson University
Long-Run Macroeconomic Adjustments
Chapter HighlightsCHAPTER 15- In macroeconomics, the short run is a period in which nominal wages are fixed; they do not change in
response to changes in the price level. In contrast, the long run is a period in which nominal wages are fully
responsive to changes in the price level.
- The short-run aggregate supply curve is upward sloping. Because nominal wages are fixed, increases in the
price level (prices received by firms) increase profits and real output. Conversely, decreases in the price level
reduce profits and real output. However, the long-run aggregate supply curve is vertical. With sufficient time
for adjustment, nominal wages rise and fall with the price level, moving the economy along a vertical aggregate
supply curve at the economy's full-employment output.
- In the short run, demand-pull inflation raises the price level and real output. Once nominal wages have
increased, the temporary increase in real output is reversed.
- Assuming a stable upsloping aggregate supply curve, rightward shifts of the aggregate demand curve of various
sizes yield the generalization that high rates of inflation are associated with low rates of unemployment,
and vice versa. This inverse relationship is known as the Phillips curve, and empirical data for the 1960s seem
to be consistent with it.
- In the 1970s and early 1980s, the Phillips curve apparently shifted rightward, reflecting stagflation—simultaneously
rising inflation rates and unemployment rates. The standard interpretation is that the stagflation
mainly resulted from huge oil price increases that caused large leftward shifts in the short-run aggregate supply
curve (so-called supply shocks). The Phillips curve shifted inward towards its original position in the
1980s. By 1989 stagflation had subsided.
- Although there is a short-run tradeoff between inflation and unemployment, there is no such long-run tradeoff.
Workers will adapt their expectations to new inflation realities, and when they do, the unemployment rate
will return to the natural rate. The long-run Phillips curve is therefore vertical at the natural rate, meaning that
higher rates of inflation do not "buy" the economy less unemployment.
- Supply-side economists focus attention on government policies, such as high taxation, that impede the
expansion of aggregate supply. The Laffer curve relates tax rates to levels of tax revenue and suggests that,
under some circumstances, cuts in tax rates can expand the tax base (output and income) and increase tax
revenues. Most economists, however, believe that Canada is operating in the range of the Laffer curve where
tax rates and tax revenues move in the same, not the opposite, direction.
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2002 McGraw-Hill Higher Education