Chapter 9: Putting All Market Together: The AS-AD Model ●91: Aggregate Supply ●92: Aggregate Demand 9-3: Equilibrium Output in the Short and the Medium run e9-4: The Effects of a Monetary EXpansion 99-5: A Decrease in the budget deficit 9-6: Changes in the price of oil ●9-7:Conc| uSIons 2003-7-20
2003-7-20 1 Chapter 9: Putting All Market Together: The AS-AD Model 9-1: Aggregate Supply 9-2: Aggregate Demand 9-3: Equilibrium Output in the Short and the Medium Run 9-4: The Effects of a Monetary Expansion 9-5: A Decrease in the Budget Deficit 9-6: Changes in the Price of Oil 9-7: Conclusions
9-1: Aggregate Supply e Recall our characterization of wage and price determination in chapter 8 W=Pe F(u, Z) P=(1+p)W Combining these two equation P= Pe(1+ Flu, z) uUL=(L-N)=1-N/L=1-Y/ P=Pe(1+FFI(1-Y/L), ZI (9.1) to continue 2003-7-20
2003-7-20 2 9-1: Aggregate Supply Recall our characterization of wage and price determination in chapter 8 W = Pe F(u , z) P = (1+ μ)W Combining these two equation P= Pe (1+ μ) F(u , z) ∵ u≡ U/L = (L-N)/L = 1- N/L = 1- Y/L ∴ P= Pe (1+ μ) F[(1-Y/L) , z] (9.1) to continue
The Derivation of the Aggregate Supply Relation Note two things about equation( 9.1) 1. a higher expected price level leads, one for one, to a higher actual price level 9 2. An increase in output leads to an increase in the price level, This is the result of four underlying steps o An increase in output to an increase in employment o The increase in employment leads to a decrease in unemployment rate o The lower unemployment rate leads to an increase in nominal wages o The increase in nominal wages leads to an increase in costs Which leads firms to increase prices to continue 2003-7-20 3
2003-7-20 3 The Derivation of the Aggregate Supply Relation Note two things about equation (9.1): 1. A higher expected price level leads, one for one, to a higher actual price level 2. An increase in output leads to an increase in the price level.This is the result of four underlying steps: ⚫ An increase in output to an increase in employment ⚫ The increase in employment leads to a decrease in unemployment rate. ⚫ The lower unemployment rate leads to an increase in nominal wages ⚫ The increase in nominal wages leads to an increase in costs, which leads firms to increase prices. to continue
The characteristics of the aggregate supply curve in figure 9-1 ● It is upward sloping e When output is above its natural level the price level is higher than expected: P> Pe. Conversely: when output is below its natural level, the price level is lower than expected e It goes through point A, where Y=Y and P= pe. That is, if output is equal to its natural level Y, then the price level is equal to the expected price level: P= Pe supply curve up. Conversely, a decrease in the expecte o e An increase in the expected price level shifts the aggregat price level shifts the aggregate supply curve down 2003-7-20
2003-7-20 4 The characteristics of the aggregate supply curve in figure 9-1 It is upward sloping When output is above its natural level, the price level is higher than expected: P> Pe .Conversely: when output is below its natural level, the price level is lower than expected: P< Pe . It goes through point A, where Y= Yn and P= Pe .That is,if output is equal to its natural level Yn , then the price level is equal to the expected price level: P= Pe . An increase in the expected price level shifts the aggregate supply curve up. Conversely, a decrease in the expected price level shifts the aggregate supply curve down
Figure 9-1:The Aggregate Supply Curve Price level .p AS Output Y Price level. p XS(for pei >pe) (for P) P Output Y
Figure 9-1:The Aggregate Supply Curve Price level ,P AS (a) Pe A Yn Output Y Price level, P AS¹(for P e ¹> Pe ) AS(for Pe ) Pe ¹ A¹ (b) Pe A Yn Output Y