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Aggregate Supply Relation

aggregate supply - shows effects of output on price level  

  • W = PeF(u,z)
  • P = (1+m)W = (1+m)PeF(u,z)
  • u = (L-N)/L
    • N = employment, L = labor force
    • Y=N >> u = (L-Y)/L = 1 - Y/L
  • P = (1+m)Pe F(1-Y/L,z)
    • increase in output >> employment increase >> lower unemployment >> nominal wage increase >> increased price level
    • increase in expected price >> nominal wage increase >> increased price level
  • upward sloping (output directly related to price level)

 

  • at Yn, P=Pe
    • price equal expected price when output at natural level of output
  • greater than natural level of output >> price level greater than expected (P > Pe)
  • lower than natural level of output >> price level lesser than expected (P < Pe)

 

  • changes in expected price level don't affect the natural level of output
  • increase expected price level >> shift AS relation up
  • decrease expected price level >> shift AS relation down
Subject: 
Economics
Subject X2: 
Economics

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