"Supply Side" ideas first became prominent in the late 1970's, when inflation rates close to 10% were common. While not remarkable on a world scale, this was quite high by the standards of US history, and the problem of stabilizing the price level -- of disinflation -- was a central concern. Recall, disinflation can be a painful process.
In the Figure, we begin with inflation at F, just the rate that people expect, so the Friedman Curve FC1 passes through the rate of growth of potential output, G, at just that level. Aggregate demand is growing at the rate that makes all this a stable equilibrium, shown by Pigou Curve PC1. To get rid of inflation we would have to raise taxes, cut government spending and raise interest rates so that the Pigou Curve shifts to PC2. That will give stable prices, and once people become accustomed to a zero inflation rate, the Friedman Curve will shift downward to intersect the horizontal axis at G. We will be back to the NAIRU and production at the NAIRGDP. But in the "short run," we will have a recession with growth at -G*.
The Supply Side idea proposes a possible alternative.
Supply Side Disinflation
