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# Ch7.1 - Chapter 7 Putting All Markets Together The AS...

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Chapter 7 Putting All Markets ogether: The AS D Model Together: The AS-AD Model 1

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Chapter 7 1. Aggregate Supply 2
1.1 D ERIVING THE AS RELATION | The aggregate supply relation captures the effects of output on the price level. | It is derived from the behavior of wages and prices. | From now on, we drop the assumption that the expected price level equals to the actual price level. 3

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D ERIVING THE AS RELATION 1. Eliminate the nominal wage W. y WS: W = P e F ,Z S (u, ) y PS: P=(1+ μ )W, ubstitute W into PS relation That is y Substitute W into PS relation. That is, P = P e (1+ μ ) F(u,z) (1) ssume that both nd z are constant y Assume that both μ and z are constant. y In words, the price level depends on the xpected price level and the unemployment expected price level and the unemployment rate. 4
D ERIVING THE AS RELATION 2. Express the unemployment rate in terms of utput: output UL N N Y u LL L L = = = − = − 1 1 y Therefore, for a given labor force, the higher is output, the lower is the unemployment rate.

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Ch7.1 - Chapter 7 Putting All Markets Together The AS...

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