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)
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)
