(BQ) Part 2 book "Macroeconomics principles and policy" has contents: Money and the banking system, money and the banking system, budget deficits in the short and long run, international trade and comparative advantage, exchange rates and the macroeconomy,.and other contents. | Find more at Licensed to: Bringing in the Supply Side: Unemployment and Inflation? We might as well reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by [demand] or [supply]. ALFRED MARSHALL T he previous chapter taught us that the position of the economy’s total expenditure (C 1 I 1 G 1 (X 2 IM)) schedule governs whether the economy will experience a recessionary or an inflationary gap. Too little spending leads to a recessionary gap. Too much leads to an inflationary gap. Which sort of gap actually occurs is of considerable practical importance, because a recessionary gap translates into unemployment whereas an inflationary gap leads to inflation. But the tools provided in Chapter 9 cannot tell us which sort of gap will arise because, as we learned, the position of the expenditure schedule depends on the price level—and the price level is determined by both aggregate demand and aggregate supply. So this chapter has a clear task: to bring the supply side of the economy back into the picture. Doing so will put us in a position to deal with the crucial question raised in earlier chapters: Does the economy have an efficient self-correcting mechanism? We shall see that the answer is “yes, but”: Yes, but it works slowly. The chapter will also enable us to explain the vexing problem of stagflation—the simultaneous occurrence of high unemployment and high inflation—which plagued the economy in the 1980s and which some people worry may stage a comeback. C O N T E N T S PUZZLE: WHAT CAUSES STAGFLATION? THE AGGREGATE SUPPLY CURVE Why the Aggregate Supply Curve Slopes Upward Shifts of the Aggregate Supply Curve EQUILIBRIUM OF AGGREGATE DEMAND AND SUPPLY ADJUSTING TO A RECESSIONIONARY GAP: DEFLATION OR UNEMPLOYMENT? Why Nominal Wages and Prices Won’t Fall (Easily) Does the Economy Have a Self-Correcting Mechanism? An Example from Recent History: Deflation in
