aggregate supply - shows effects of output on price level  

• W = P^eF(u,z)
• P = (1+m)W = (1+m)P^eF(u,z)
• u = (L-N)/L
  • N = employment, L = labor force
  • Y=N >> u = (L-Y)/L = 1 - Y/L
• P = (1+m)P^e 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 Y_n, P=P^e
  • price equal expected price when output at natural level of output
• greater than natural level of output >> price level greater than expected (P > P^e)
• lower than natural level of output >> price level lesser than expected (P < P^e)

• 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