Aggregate Supply Curve Research Articles

An Investigation of the Relationship between Oil Prices and Inflation in South Africa

It is widely believed that the increase in the real price of oil early 1970s was a major cause of high inflation and recession. In recent years, oil prices have been rising and its economic impact is an issue that continues to attract more attention globally and South Africa in particular. An increase in oil price and related goods causes a shift in the aggregate supply curve that results in higher price level. This paper uses Augmented Dickey-Fuller technique in testing the unit root property of the series, Johansen-Juselius Cointegration methods for testing long-run relationship between oil prices and inflation. The result showed that there is co-integrating relationship between oil price and inflation for South African data. Further effort was made to check the causality relationship that exists between the two variables by employing the Granger causality at two and four lag periods. The results showed the same at different lags. The first test was conducted using lag two (2) and in the result unidirectional causality was seen running from oil price to inflation. Further test at lag four (4) was carried out and it only supported the first by also indicating a unidirectional causality running from oil price to inflation. Policy implications and suggestion for future research are made in the paper. DOI: 10.5901/mjss.2013.v4n6p105

The Inflation-Output Trade-Off Revisited

This paper shows that at the zero bound of the short term nominal interest rate there is a strong trade-off between inflation and output, i.e., excess inflation has significant positive impact on output and employment. This remains true even if expectations have fully adjusted and inflation is anticipated. We show that even in a microfounded version of the well known New Classical example with a Phelps/Lucas/Kydland/Prescott style aggregate supply curve the trade-off between anticipated inflation and output is not zero as is sometimes suggested based upon the economic experience of the 1970’s. Instead the model solution features a well defined trade-off that may even approach infinity at which point the model collapses — due to a clash between aggregate demand and supply — and no solution exists. We offer tentative interpretations of this phenomenon.

Macro-economic model of aggregate market in the Albanian economy, and relevant problems thereto

This paper uses concrete data obtained on the Albanian economy to analyse the positions of aggregate demand/supply curves in the economy. As examples from micro-economics, we have taken the models of Ŵalras and Marshall, to view the possibilities of achieving an economic equilibrium. Data available from the Albanian economy, and from the global economic trends generally, have shown that the positions of curves are such, with differences in their inclination, while the classic position of the aggregate demand curve, with a negative trend, studied in the macro-economic theory, is unique. Therefore, our objective is to try and show the scholars of the field that the macro-economic problems must be viewed in this light, and not through the static scheme used so far.The equilibrium is met not only when the aggregate demand and aggregate supply curves are met, meaning when the aggregate expenditure are equal to aggregate production, but it exists at every moment, independently of whether it is consistent or not, while the pricing trends continue to increase, similar to two other aggregates. The understanding of such a situation should give the possibility to governments and other policy-making institutions to review their positions and relations with monetary and fiscal indicators, in a view of making the organic connection, and increasing their working effectiveness. The paper aims to show how one can define the relation between monetary and fiscal policies necessary to see their role and relevance in the economic growth of a country.

On the fundamental diagram and supply curves for congested urban networks

Macroscopic fundamental diagrams (MFD) of traffic for some networks have been shown to have similar shape to those for single links. They have erroneously been used to help estimate the level of travel in congested networks. We argue that supply curves, which track vehicles in their passage through congested networks, are needed for this purpose, and that they differ from the performance curves generated from MFD. We use a microsimulation model, DRACULA and two networks, one synthesizing the network for Cambridge, England, and one of the city of York, England, to explore the nature of performance curves and supply curves under differing patterns of demand. We show that supply curves differ from performance curves once the onset of congestion is reached, and that the incorrect use of performance curves to estimate demand can thus seriously underestimate traffic levels, the costs of congestion, and the value of congestion relief measures. We also show that network aggregated supply curves are sensitive to the temporal distribution of demand and, potentially, to the spatial distribution of demand. The shape of the supply curve also differs between origin–destination movements within a given network. We argue that supply curves for higher levels of demand cannot be observed in normal traffic conditions, and specify ways in which they can be determined from microsimulation and, potentially, by extrapolating observed data. We discuss the implications of these findings for conventional modelling of network management policies, and for these policies themselves.

On the permanent effect of an aggregate demand shock: Evidence from the G-7 countries

This paper extends the work of Cover, Enders and Hueng (2006) to examine the idea that an aggregate demand shock may have permanent effect on the output level by indirectly shifting the aggregate supply curve. We utilize the bivariate SVAR modeling and adopt an identification scheme, which allows for the possibility that a shift in the aggregate demand curve may induce the long-run aggregate supply curve to shift. We have shown that aggregate supply shocks are positively affected by the demand shocks in each of the G-7 countries. It is found that a one-time positive aggregate demand shock increases the output level permanently in these industrialized economies. We have also shown that our decomposition strategy can help resolve anomalies in the responses of inflation to a positive aggregate supply shock observed in a simple Blanchard–Quah decomposition.

The Potential Supply of Carbon Dioxide Offsets from the Anaerobic Digestion of Dairy Waste in the United States

AbstractAnaerobic digestion allows farmers to create renewable energy and significantly reduce manure methane emissions. Estimates of the aggregate supply curve for carbon dioxide (CO2) equivalent offsets from the adoption of anaerobic digestion (AD) were developed based upon dairy farm data collected by the National Agricultural Statistics Service/Economic Research Service Agricultural Resource and Management Survey. The estimated supply curve demonstrates how the supply of CO2 offsets from AD would be influenced by offset prices. A sensitivity analysis examines how changes in capital and operating costs, as well as energy prices, would influence the supply of offsets. Under a base set of assumptions, offset prices in excess of $15 per ton of CO2 equivalent would be required to reduce methane emissions from manure storages by 50% from 2005 levels.

On the Fundamental Diagram and Supply Curves for Congested Urban Networks

Macroscopic fundamental diagrams (MFD) of traffic for some networks have been shown to have similar shape to those for single links. They have erroneously been used to help estimate the level of travel in congested networks. We argue that supply curves, which track vehicles in their passage through congested networks, are needed for this purpose, and that they differ from the performance curves generated from MFD. We use a microsimulation model, DRACULA and two networks, one synthesizing the network for Cambridge, England, and one of the city of York, England, to explore the nature of performance curves and supply curves under differing patterns of demand.We show that supply curves differ from performance curves once the onset of congestion is reached, and that the incorrect use of performance curves to estimate demand can thus seriously underestimate traffic levels, the costs of congestion, and the value of congestion relief measures. We also show that network aggregated supply curves are sensitive to the temporal distribution of demand and, potentially, to the spatial distribution of demand. The shape of the supply curve also differs between origin-destination movements within a given network.We argue that supply curves for higher levels of demand cannot be observed in normal traffic conditions, and specify ways in which they can be determined from microsimulation and, potentially, by extrapolating observed data. We discuss the implications of these findings for conventional modeling of network management policies, and for these policies themselves.

A Very Short Note Covering the Five Easy Steps Needed to Show that Keynes’s Analysis in Footnote Two on Page 55 of the General Theory is Correct with a Minor Exception that Was Correctly Analyzed by Keynes in Footnote One on p. 283 of the General Theory in Chapter 20

Keynes’s mathematical economics analysis of the Aggregate Supply Function and the Aggregate Supply Curve contained in footnote two on p.55 of the General Theory is correct with the exception of a very minor error that can easily be spotted by anyone who has worked through Keynes’s chapter 20 analysis. This minor error was corrected by Keynes in his much, much, more extensive and detailed mathematical economics analysis presented on pp.282-285 of the General Theory. Specifically, the analysis in footnote one on p.283 give a correct analysis of the inverse function form of the derivative, dN/dZw (dN/dZ) ,of the Aggregate Supply Function that Keynes inadvertently used in the footnote on p.55 of the General Theory.

An Analysis of Keynes’s Straightforward, Easy to Follow, Alleged 'Infamous' Footnote 2 on pp. 55-56 of the General Theory - Is It Really that Difficult and Abominable?

This note demonstrates that mathematical analysis in so called, alleged, Infamous footnote in General Theory is straightforward if reader possesses basic integration skills, understands Inverse Function Rule for unique functions, can follow Keynes's completely worked out microeconomic analysis in chapter 20 of GT of pure competition using standard marginal productivity analysis of one variable factor of production and one fixed factor of production at level of firm-industry, and understands that Keynes makes aggregation assumptions only about one variable input, labor, and one fixed input, capital (equipment). Keynes provides aggregation assumptions for no other variable input in General Theory. First, Infamous Footnote tells reader to set ΔZw /ΔN=ΔDw /ΔN and solve. Given that ΔZw /ΔN =1 and Dw =pwO, where O=Ψ(N), then ΔDw /ΔN= pw Ψ'(N). Keynes expected a reader to obtain 1=pw Ψ'(N) or w/p=Ψ'(N) so that the proceeds of marginal product is equal to marginal factor-cost at every point on aggregate supply curve. Second, slope of aggregate supply function, ΔZw /ΔN, where Zw =N Pw, is 1. Unfortunately,Keynes gives slope of inverse function, ΔN/ΔZw, where N=Zw –Pw ,which is equal to 1/w, in last line of footnote. This is Keynes’s only slip in this footnote and it is very minor.

MACROECONOMIC EFFECTS OF TERRORIST SHOCKS IN ISRAEL

This paper estimates a structural vector autoregression to assess the empirical effects of terrorism on output and prices in Israel. Long‐run restrictions are used to interpret the effects in terms of aggregate demand and supply curves. The responses indicate that the immediate effects of terrorism are similar to those associated with a negative demand shock. Such a leftward shift of the aggregate demand curve is consistent with the existence of adverse effects on most components of aggregate expenditure documented in previous empirical studies. The long‐term consequences of terrorism are similar to those related to a negative supply shock. Such a leftward shift of the long‐run aggregate supply curve agrees with adverse effects on the determinants of the potential output, such as contractions of physical capital highlighted in earlier work, as well as reductions of technological innovations and slowdowns of net immigrations, which have not been fully analyzed in the existing empirical literature.

Retiring the Short-Run Aggregate Supply Curve

The author argues that the aggregate demand/aggregate supply (AD/AS) model is significantly improved—although certainly not perfected—by trimming it of the short-run aggregate supply (SRAS) curve. Problems with the SRAS curve are shown first for the AD/AS model that casts the AD curve as identifying the equilibrium level of output associated with each price level (as found in most intermediate macroeconomics textbooks). Problems are then shown for the AD/AS model in which the AD curve is more modestly assumed to capture the relationship between the price level and aggregate expenditures (as found in principles of economics textbooks).

Labour Supply, Employment and Unemployment in Macroeconomics: A Critical Appraisal of Orthodoxy and a Heterodox Alternative

The paper begins with a critical evaluation of the modelling of the individual supply function of labour in orthodox economics. The varying ways in which the aggregate labour supply curve has been represented in macroeconomics texts is then outlined. A proposal for a simple representation of the aggregate labour supply curve based on economic, social and institutional realities is then provided. Finally the implications of our discussion for macroeconomic analysis are drawn.

Generators' bidding behavior in the NYISO day-ahead wholesale electricity market

This paper proposes a statistical and econometric model to analyze the generators' bidding behavior in the NYISO day-ahead wholesale electricity market. The generator level bidding data show very strong persistence in generators' grouping choices over time. Using dynamic random effect ordered probit model, we find that persistence is characterized by positive state dependence and unobserved heterogeneity and state dependence is more important than unobserved heterogeneity. The finding of true state dependence suggests a scope for economic policy intervention. If NYISO can implement an effective policy to switch generators from higher price groups to lower price groups, the effect is likely to be lasting. As a result, the market price can be lowered in the long-run. Generators' offered capacity is estimated by a two-stage sample selection model. The estimated results show that generators in higher-priced groups tend to withhold their capacity strategically to push up market prices. It further confirms the importance of an effective policy to turn generators into lower price groups in order to mitigate unexpected price spikes. The simulated market prices based on our estimated aggregate supply curve can replicate most volatility of actual DA market prices. Applying our models to different demand assumptions, we find that demand conditions can affect market prices significantly. It validates the importance of introducing demand side management during the restructure of electricity industry.

Macroeconomic Effects of Terrorist Shocks in Israel

This paper estimates a structural vector autoregression model to assess the dynamic effects of terrorism on output and prices in Israel over the post-1985 period. Long-run restrictions are used to obtain an interpretation of the effects of terrorism in terms of aggregate demand and supply curves. The empirical responses of output and prices suggest that the immediate effects of terrorism are similar to those associated with a negative demand shock. Such leftward shift of the aggregate demand curve is consistent with the adverse effects of terrorism on most components of aggregate expenditure, which have been documented in previous studies. In contrast the long-term consequences of terrorism are similar to those related to a negative supply shock. Such leftward shift of the long-run aggregate supply curve suggests the potential existence of adverse effects of terrorism on the determinants of potential output, which have not been considered so far.

Study on probability distribution of prices in electricity market: A case study of zhejiang province, china

The study on probability density function and distribution function of electricity prices contributes to the power suppliers and purchasers to estimate their own management accurately, and helps the regulator monitor the periods deviating from normal distribution. Based on the assumption of normal distribution load and non-linear characteristic of the aggregate supply curve, this paper has derived the distribution of electricity prices as the function of random variable of load. The conclusion has been validated with the electricity price data of Zhejiang market. The results show that electricity prices obey normal distribution approximately only when supply-demand relationship is loose, whereas the prices deviate from normal distribution and present strong right-skewness characteristic. Finally, the real electricity markets also display the narrow-peak characteristic when undersupply occurs.

The New Keynesian Phillips Curve: From Sticky Inflation to Sticky Prices

The New Keynesian Phillips Curve (NKPC) model of inflation dynamics based on forward‐looking expectations is of great theoretical significance in monetary policy analysis. Empirical studies, however, often find that backward‐looking inflation inertia dominates the dynamics of the short‐run aggregate supply curve. This inconsistency is examined by investigating multiple structural changes in the NKPC for the U.S. between 1960 and 2005, employing both inflation expectations survey data and a rational expectations approximation. We find that forward‐looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation, providing empirical support for sticky price models over the last two decades. A break in the intercept of the NKPC is also identified around 2001 and this may be associated with U.S. monetary policy in that period.

Aggregate demand and supply

This paper is part of a broader project that provides a microfoundation to the General Theory of J. M. Keynes. I call this project “old Keynesian economics” to distinguish it from new‐Keynesian economics, a theory that is based on the idea that to make sense of Keynes we must assume that prices are sticky. I describe a multi‐good model in which I interpret the definitions of aggregate demand and supply found in the General Theory through the lens of a search theory of the labor market. I argue that Keynes' aggregate supply curve can be interpreted as the aggregate of a set of first‐order conditions for the optimal choice of labor and, using this interpretation, I reintroduce a diagram that was central to the textbook teaching of Keynesian economics in the immediate post‐war period.

The Price-Output Correlation and the Variance of Output

Using data from Backus and Kehoe (1992) we establish the existence of a positive relationship between the price-output correlation and the variance of output. This is consistent with the idea that reductions in the magnitude of aggregate demand shocks have been the dominant cause of changes in the price-output correlation across countries and across time. By contrast, changes in the magnitude of aggregate supply shocks would impart a negative relationship between the price-output correlation and the variance of output. We also consider and rule out the possibility that a steepening of the aggregate supply curve is the cause of the negative price-output correlation in the postwar era. In the postwar period the variance of output and the price-output correlation both fell compared to the pre-WW II period. We argue that both these changes are likely the result of a more effective monetary policy.

The nature of the ADAS model based on the ISLM model

The aggregate demand and supply model (ADAS) is interpreted as a synthesis of the Keynesian and neoclassical models. It uses the ISLM model, without explaining its nature, to derive aggregate demand (AD). It is combined with an aggregate supply (AS) curve to explain price- inflation and output dynamics. This paper argues that neither the AD nor AS curve is conceptually the same as its microeconomic counterpart and ADAS is not a synthesis. In fact ADASimplies that discretionary policy is necessary and that price changes do not perform their traditional negative feedback function.

Teaching the Short-Run Aggregate Supply Curve in Introductory Economics

Consistency in the development and presentation of the aggregate demand-aggregate supply model in introductory economics is crucial. Logical consistency requires drawing on the underlying microeconomic fundamentals, especially for distinguishing between 'movements along' and 'shifts in' the short-run aggregate supply curve. Empirical consistency requires accounting for observed changes in real national output and the aggregate price level, for example, the absence of deflation over the past half-century for the U.S. economy. The conventional treatment of aggregate supply typically found in economic principles texts is criticized and a case is made for dropping the long-run aggregate supply curve in favor of a more dynamic analysis based on chronological time. A simple linear aggregate demand-aggregate supply model is offered for explaining both rigorously and intuitively the annual behavior of an economy.