《宏观经济学》课程教学资源（英文版）Chapter 9 Putting All Market Together：The AS-AD Model

Chapter 9: Putting All Market Together: The AS-AD Model ●91: Aggregate Supply ●92: Aggregate Demand 9-3: Equilibrium Output in the Short and the Medium run e9-4: The Effects of a Monetary EXpansion 99-5: A Decrease in the budget deficit 9-6: Changes in the price of oil ●9-7:Conc| uSIons 2003-7-20

2003-7-20 1 Chapter 9: Putting All Market Together: The AS-AD Model 9-1: Aggregate Supply 9-2: Aggregate Demand 9-3: Equilibrium Output in the Short and the Medium Run 9-4: The Effects of a Monetary Expansion 9-5: A Decrease in the Budget Deficit 9-6: Changes in the Price of Oil 9-7: Conclusions

9-1: Aggregate Supply e Recall our characterization of wage and price determination in chapter 8 W=Pe F(u, Z) P=(1+p)W Combining these two equation P= Pe(1+ Flu, z) uUL=(L-N)=1-N/L=1-Y/ P=Pe(1+FFI(1-Y/L), ZI (9.1) to continue 2003-7-20

2003-7-20 2 9-1: Aggregate Supply Recall our characterization of wage and price determination in chapter 8 W = Pe F(u , z) P = (1+ μ)W Combining these two equation P= Pe (1+ μ) F(u , z) ∵ u≡ U/L = (L-N)/L = 1- N/L = 1- Y/L ∴ P= Pe (1+ μ) F[(1-Y/L) , z] (9.1) to continue

The Derivation of the Aggregate Supply Relation Note two things about equation( 9.1) 1. a higher expected price level leads, one for one, to a higher actual price level 9 2. An increase in output leads to an increase in the price level, This is the result of four underlying steps o An increase in output to an increase in employment o The increase in employment leads to a decrease in unemployment rate o The lower unemployment rate leads to an increase in nominal wages o The increase in nominal wages leads to an increase in costs Which leads firms to increase prices to continue 2003-7-20 3

2003-7-20 3 The Derivation of the Aggregate Supply Relation Note two things about equation (9.1): 1. A higher expected price level leads, one for one, to a higher actual price level 2. An increase in output leads to an increase in the price level.This is the result of four underlying steps: ⚫ An increase in output to an increase in employment ⚫ The increase in employment leads to a decrease in unemployment rate. ⚫ The lower unemployment rate leads to an increase in nominal wages ⚫ The increase in nominal wages leads to an increase in costs, which leads firms to increase prices. to continue

The characteristics of the aggregate supply curve in figure 9-1 ● It is upward sloping e When output is above its natural level the price level is higher than expected: P> Pe. Conversely: when output is below its natural level, the price level is lower than expected e It goes through point A, where Y=Y and P= pe. That is, if output is equal to its natural level Y, then the price level is equal to the expected price level: P= Pe supply curve up. Conversely, a decrease in the expecte o e An increase in the expected price level shifts the aggregat price level shifts the aggregate supply curve down 2003-7-20

2003-7-20 4 The characteristics of the aggregate supply curve in figure 9-1 It is upward sloping When output is above its natural level, the price level is higher than expected: P> Pe .Conversely: when output is below its natural level, the price level is lower than expected: P< Pe . It goes through point A, where Y= Yn and P= Pe .That is,if output is equal to its natural level Yn , then the price level is equal to the expected price level: P= Pe . An increase in the expected price level shifts the aggregate supply curve up. Conversely, a decrease in the expected price level shifts the aggregate supply curve down

Figure 9-1:The Aggregate Supply Curve Price level .p AS Output Y Price level. p XS(for pei >pe) (for P) P Output Y

Figure 9-1:The Aggregate Supply Curve Price level ,P AS (a) Pe A Yn Output Y Price level, P AS¹(for P e ¹> Pe ) AS(for Pe ) Pe ¹ A¹ (b) Pe A Yn Output Y

9-2: Aggregate Demand ●( goods market S YECCY-T)+lr,)+G (Financial market) LM M/P= YLO e We represent the aggregate demand relation by YEY(M/P, G, D) (92) 十 e Output is an increasing function of the real money stock, an increasing function of government spending and a decreasing function of taxes. Given M, G, t, an increase in price level P leads to a decrease in real money stock, M/P, which leads to a decrease in output This is the relation capture by the Ad curve in Figure 2003-7-20 6

2003-7-20 6 9-2: Aggregate Demand (goods market) IS: Y = C(Y-T) + I(Y,i) + G (Financial market) LM: M/P = YL(i) We represent the aggregate demand relation by Y=Y(M/P, G, T) (9.2) ( + , + , - ) Output is an increasing function of the real money stock, an increasing function of government spending, and a decreasing function of taxes. Given M, G, T, an increase in price level P leads to a decrease in real money stock, M/P, which leads to a decrease in output. This is the relation capture by the AD curve in Figure

Interest rate i LMI (for PI>P LM (for P Price level p AD tput Y

Interest rate i LM¹ (for P¹> P) i¹ LM (for P) i IS Y¹ Y O u t p u t Y Price level p P¹ A ¹ P A AD Y¹ Y Output Y

9-3: Equilibrium Output in the Short and the Medium Run AS relation P=Pe(1+pF(1-Y),2] AD relation YEY(M/P, G,T) The equilibrium is given by the intersection of the two curves at point A By construction, at point A, the goods, financial, and the labor market are all in equilibrium. The fact that the labor market is in equilibrium comes from the fact that point a is on the aggregate supply curve. The fact that goods and financial markets are in equilibrium comes from the fact that point a is also on the aggregate demand curve. The equilibrium level of output and price level are given by Y and P 2003-7-20 8

2003-7-20 8 9-3: Equilibrium Output in the Short and the Medium Run AS relation P= Pe (1+ μ) F[(1-Y/L) , z] AD relation Y= Y ( M/P, G, T ) The equilibrium is given by the intersection of the two curves at point A. By construction, at point A, the goods, financial, and the labor market are all in equilibrium. The fact that the labor market is in equilibrium comes from the fact that point A is on the aggregate supply curve. The fact that goods and financial markets are in equilibrium comes from the fact that point A is also on the aggregate demand curve. The equilibrium level of output and price level are given by Y and P

Figure 9-3: Equilibrium output and price level Price level p AS T AD Output Y

Figure 9-3: Equilibrium output and price level Price level P AS P A Pe B AD Yn Y Output Y

The Dynamics of output and the price level e As we look at the evolution of output and other variable over time, the other thing we need to do is to introduce time indices So, Pt will refer to the price level in year t, Pt-1 to the price level in year t-1, Pt+ 1 to the price level in year t+1, and so on e Using the notation, the assumption that the expected price level equals the price level last year is written as P = P e And the aggregate supply and demand relation must now be AS relation Pt=P1(1+p)F[(1Y+/L),2](93) ● AD relation YI (M/P1, G,TI (94) Note that the parameters (u, z) and the exogenous variables L, M, G, T do not have a time subscript. This is because we shall assume they remain constant, so there is no need for a time 2003-7-20 10

2003-7-20 10 The Dynamics of output and the price level As we look at the evolution of output and other variable over time, the other thing we need to do is to introduce time indices. So, Pt will refer to the price level in year t,Pt-1 to the price level in year t-1,Pt+1 to the price level in year t+1, and so on. Using the notation, the assumption that the expected price level equals the price level last year is written as Pt e = Pt-1 And the aggregate supply and demand relation must now be: AS relation Pt = Pt-1 (1+μ) F [(1-Yt / L), z] (9.3) AD relation Yt = Y[ (M/ Pt ), G, T ] (9.4) Note that the parameters (µ, z) and the exogenous variables L, M, G, T do not have a time subscript. This is because we shall assume they remain constant, so there is no need for a time