Page 333 - Economics

CONFIRMING PAGES

IN THIS CHAPTER YOU WILL LEARN:
• About the relationship between short-run
aggregate supply and long-run aggregate supply.
• How to apply the “extended” (short-run/long-run)
AD-AS model to inflation, recessions, and
unemployment. 15
• About the short-run tradeoff between inflation and
unemployment (the Phillips Curve).
• Why there is no long-run tradeoff between inflation
and unemployment.
• The relationship between tax rates, tax revenues,
and aggregate supply.

Extending the Analysis of

Aggregate Supply

During the early years of the Great Depression, many economists suggested that the economy would
correct itself in the long run without government intervention. To this line of thinking, economist
John Maynard Keynes remarked, “In the long run we are all dead!”
For several decades following the Great Depression, macroeconomic economists understandably
focused on refining fiscal policy and monetary policy to smooth business cycles and address the
problems of unemployment and inflation. The main emphasis was on short-run problems and policies
associated with the business cycle.
But over people’s lifetimes, and from generation to generation, the long run is tremendously impor-
tant for economic well-being. For that reason, macroeconomists have refocused attention on long-
run macroeconomic adjustments, processes, and outcomes. As we will see in this and the next three

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