What Is the Aggregate Supply Curve?
The aggregate supply curve shows the combination of price and output, that is, the total amount of products that the whole society is willing to supply at a certain price level. The total amount of products that all manufacturers are willing to supply depends on the prices they receive when they supply them, and the labor and other factors of production that they must pay to produce them. Therefore, the aggregate supply curve reflects the state of the factor market (especially the labor market) and the product market.
Aggregate supply curve
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- If
- When aggregate demand changes, ie
- versus
- In the classical theory based on the hypothesis that wages are fully flexible and market competition is complete, the aggregate supply curve is vertical (Liang Xiaomin, 1993, P450, P464). In this case, no matter how the total demand changes, the output level will not move, so that the currency is neutral. At this time, the neutrality of the currency has not been distinguished from long-term and short-term.
- Scenarios where single target is feasible
- Contrary to the classical school of thought's assumption that wages are fully flexible, traditional Keynesianism considers nominal wages to be rigid, from which the aggregate supply curve rising to the right can be derived. In this case, if currency expansion can stimulate effective demand, the currency will become non-neutral. That is, money can affect real economic variables such as output and employment.
- Friedman takes inflation expectations into account, thereby distinguishing the long-term and short-term Phillips curves, and first distinguishes between long-term neutral and short-term non-neutral currencies (Zeng Linghua, 2000). Because the short-term Phillips curve extends from left to right, monetary policy is effective and non-neutral in the short term. But because expectations are adjustable, in the long run, the Phillips curve is vertical again. This in turn leads to the long-term neutrality of the currency.
- The distinction between long-term and short-term aggregate supply curves was developed in the Lucas (1972, 1975) model. It shows that under the condition of constant inflation expectations, there is a positive correlation between the output gap and the inflation gap. This shows that in the short term
- Aggregate supply curve
- The development of neo-Keynesian theory (see David Romer, 1999, P358-388; Olivier B Blanchard, 2002, P799-820) also shows that the short-run aggregate supply curve is tilted to the right. This is similar to the views of monetarism and Lucas. However, due to the existence of staggered pricing, menu costs, and insufficient competition, even if monetary policy can be accurately predicted, monetary policy is still effective. Because of the existence of these three factors, the stickiness of wages and prices will lead to a slope of the aggregate supply curve.
- Unstable or uncertain aggregate supply curve makes it impossible to target a single target
- Scholars who insist on the single goal of stable currency value often quote real business cycle models as the theoretical basis. The theory considers that stochastic technological shocks are the main source of business cycles and that monetary factors have not been introduced into the model (David Romer, 1999, P188-210). Thus, in this theory, money becomes neutral, even in the short run. This theory had a great impact on macroeconomic theory in the United States in the 1980s (Gerhard Yining, 2002, P6). However, due to the premise that it is too strict (complete competition, complete information, and clearing of all markets), it is difficult to find support in the real economic world, so it was quickly received a series of new studies based on strict microeconomic basic research in the past 10 years Challenges of the Keynesian macroeconomic model (Gerhard Yining, P6-8).
- Changes in the total supply level and price level in the same direction reflect the conditions of the product market and the factor market. Specifically, when the price of goods in the market rises, manufacturers can pay more for the factors of production, so they can use more factors of production and produce more products. The aggregate supply curve that slopes to the right is supported by a lot of experience and facts in countries around the world. China s economic operation in the past 20 years also shows that the aggregate supply curve that slopes to the upper right exists. In general, regarding the role of monetary policy and the shape of the aggregate supply curve, economic theoretical understanding seems to be gradually converging. .