CHAPTER 7

AGGREGATE SUPPLY
AGGREGATE SUPPLY RELATION: effects of output in price level
- combination of wage determination and price determination
- labor market relation
- P = P^e (1+m) F(1-Y/L, z)
- P: price level
- P^e: expected price level
- m: markup
- (1-Y/L): unemployment
- z: catchall variables; other factors that affect wages
AS RELATION
First property: increase in output = increase in price level
- increase output, increase employment, decrease unemployment, increase nominal
wage, increase prices, increase price level
Second property: increase in expected price level = increase in actual level (on
e-to-one)
- increase expected price level, increase nominal wage, increase cost, increase
prices, increase price level
NOTES
1. In a given labor force, higher output means lower unemployment rate (inversel
y related)
2. If output = natural rate of output; price level = expected price level
3. Output and price level; directly related
4. Upward sloping: Aggregate Supply Curve
5. Increase in expected price level, shift curve up. Decrease in expected price
level, shift curve down.
6. shift up or shift down: what is the price level at a given output
AGGREGATE DEMAND
- derived from IS-LM curve
- goods market and financial markets relation
- Y = Y(M/P, G, T)
NOTES
1. Output and price level; inversely related
WHY: increase price level, decrease real money stock, increase interest rate, de
crease output LM curve shifts up (contractionary)
2. Hindi lang price level ang nakakapagpa-shift sa ADR. Any variables that can m
ove the IS curve (+ govt spending, - taxation, + investment) or LM curve (+ real
money) will also shift the ADR.
3. shift right or shift left: what is the output at a given price level
EQUILIBRIUM IN THE SHORT RUN AND MEDIUM RUN
- equilibrium depends on the expected price level
- at equilibrium: labor market, financial market and goods market are all equal
- given by Y and P
- sa short run, there is no reason for output to be equal to its natural level.
ang equilbrium ay apektado ng ASR & ADR.
- hanggang hindi equal ang output sa natural rate, patuloy na tumataas ang expec
ted price level which leads to higher price levels
- increase price level, decrease real money stock, increase interest rate, decre
ase output

EFFECTS OF MONETARY EXPANSION

- short run: shift right ADR (increase money stock, increase output)
- medium run: shift up ASR (increase expected price level, output and money stoc
k will go back)
- prices and nominal money stock; directly proportionally related (medium run)
- changes in LM curve: naapektuhan ng increase in nominal money and increase in
price level (short run)
- neutrality of money: bumabalik ang real money at interest rate in the medium r
un
DECREASE IN THE BUDGET DEFICIT
- fiscal contraction (decrease spending, taxes unchanged)
- short run: shift left ADR (decrease spending, decrease output)
- medium run: shift down ASR (decrease expected price level para maabot ulit yun
g natural rate of output
- NOTE: changes in ASR, must move along to the NEW ADR
- recessions are decrease in inflations, not in price levels
- decrease price level, increase real money stock, decrease interest rate (incre
ase investment), decrease output (decrease investment)
- babalik dahil sa ASR.
- short run: decrease output, decrease investment
- medium run: decrease interest rate, increase investment
INCREASE IN THE PRICE OF OIL
- stagflation: recession + high inflation
- increase in the markup (increase in cost production)
- price setting is determined by the real wage. therefore, increase markup, decr
ease real wage, shift down price-setting curve, increase natural level of unempl
oyment, decrease natural level of employment, decrease natural rate of output
- ASR: shift up
- short run: increase in prices, decrease output
- medium run: decrease natural level of output. bagong ASR. shift up.
- both short and medium run, nagbago ang output.