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macro in a nutshell
The EAS-curve

The EAS curveThe EAS curve (EAS standing for equilibrium aggregate supply) is a vertical line in a diagram with inflation on the vertical axis and with income on the horizontal axis. It indicates how much output firms produce at different inflation rates, given that firms and workers (or unions) anticipated this rate of inflation correctly.

The EAS curve being vertical means that properly anticipated inflation does not bear on production. Output is always at potential output Y*, no matter how high inflation is. The reason is that with inflation being as anticipated, the real wage is exactly where it clears the labour market. Inflation that trade unions did foresee only affects nominal wages, but not real wages. Thus it also does not affect employment, and it does not affect output produced.

Further reading on pp. 196-167.


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