Macroeconomics

13-3

Conclusion

We began this chapter by discussing two models of aggregate supply, each of

which focuses on a different reason why, in the short run, output rises above its

natural level when the price level rises above the level that people had expect-

ed. Both models explain why the short-run aggregate supply curve is upward

sloping, and both yield a short-run tradeoff between inflation and unemploy-

ment. A convenient way to express and analyze that tradeoff is with the Phillips

curve equation, according to which inflation depends on expected inflation,

cyclical unemployment, and supply shocks.

Keep in mind that not all economists endorse all the ideas discussed here.

There is widespread disagreement, for instance, about the practical importance of

rational expectations and the relevance of hysteresis. If you find it difficult to fit

all the pieces together, you are not alone. The study of aggregate supply remains

one of the most unsettled—and therefore one of the most exciting—research

areas in macroeconomics.