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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 C Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard 2of 44 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 C Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard 3of 44 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 C Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Macroeconomics, 5/e • Olivier Blanchard 4of 44
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