Putting Putting All MarAll Markketsets
               TTogethogetherer: :  T Thehe
               ASAS––ADAD ModeModell
       CHAPTER 7
       CHAPTER 7
                                Prepared by:
                                Fernando Quijano and Yvonn Quijano
   Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall  • Macroeconomics, 5/e  •  Olivier Blanchard
          7-1  Aggregate Supply
                      The aggregate supply relation captures the effects of 
                      output on the price level.  It is derived from the 
                      behavior of wages and prices.
   odelM              Recall the equations for wage and price determination 
   AD                 from Chapter 6:
   –
   AS
   he T
   ogether:                                         W PeF(u,z)
   Ts 
   et
   arkM
   All                                               P (1 )W
   ing t
   Put  
   7:
   hapter 
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          7-1  Aggregate Supply
          Step 1:  Eliminate the nominal wage from:
                              W PeF(u,z) and P  (1 )W
   odelM
   AD
   –                                                           then
   AS
   he T                                     P Pe(1 )F(u,z)
   ogether:  T         In words, the price level depends on the expected 
   set                 price level and the unemployment rate.  We assume 
   arkM                that  and z are constant.
   All 
   ing t
   Put  
   7:
   hapter 
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          7-1  Aggregate Supply
          Step 2:  Express the unemployment rate in terms of output:
                                         u  U  L N  1 N  1 Y
   odelM                                         L          L                 L            L
   AD
   –                   Therefore, for a given labor force, the higher is output, 
   AS
   he T                the lower is the unemployment rate.
   ogether:  T                                                                              Asumsi: Y = A N
   set                                                                                                    Y = 1. N
   arkM
   All 
   ing t
   Put  
   7:
   hapter 
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