Worth: Mankiw Economics 5e CHAPTER 13 Aggregate Supply 357 Summary and Implications We have seen three models of aggregate supply and the market imperfection that each uses to explain why the short-run aggregate supply curve is upward slop- ng. One model assumes nominal wages are sticky; the second assumes informa tion about prices is imperfect; the third assumes prices are sticky. Keep in mind that these models are not incompatible with one another. We need not accept one model and reject the others. The world may contain all three of these market imperfections, and all may contribute to the behavior of short-run aggregate Although the three models of aggregate supply differ in their assumptions and emphases, their implications for aggregate output are similar. All can be summa- rized by the equation Th al rate are related to deviations of the price level from the expected price level. If the price level is higher than the expected price level, output exceeds its natural rate. If the price level is lower than the expected price level, output falls short of its natural rate. Figure 13-3 graphs this equation. Notice that the short-run aggregate supply curve is drawn for a given expectation P and that a change in Pe would shift the curve Now that we have a better understanding of aggregate supply, let's put ag- gregate supply and aggregate demand back together. Figure 13-4 uses our ag gregate supply equation to show how the economy responds to an unexpected increase in aggregate demand attributable, say, to an unexpected monetary ex pansion In the short run, the equilibrium moves from point a to point B. The increase in aggregate demand raises the actual price level from P, to P2. Because people did not expect this increase in the price level, the expected price level remains at Pi, and output rises from Yi to Y2, which is above the natural rate Y. Thus, the unexpected expansion in aggregate demand causes the economy figure 13-3 Price level, P The Short-Run Aggregate r=p+a(P-pe) Supply Curve Output aggregate deviates from the natural rate supp Y if the price level P deviates from the expected price level Short-run aggregate supply pe User JoENA: Job EFFo1429: 6264_ch13: Pg 357: 27764#/eps at 100s Mon,Feb18,200212:56User JOEWA:Job EFF01429:6264_ch13:Pg 357:27764#/eps at 100% *27764* Mon, Feb 18, 2002 12:56 AM Summary and Implications We have seen three models of aggregate supply and the market imperfection that each uses to explain why the short-run aggregate supply curve is upward slop￾ing. One model assumes nominal wages are sticky; the second assumes informa￾tion about prices is imperfect; the third assumes prices are sticky. Keep in mind that these models are not incompatible with one another. We need not accept one model and reject the others.The world may contain all three of these market imperfections, and all may contribute to the behavior of short-run aggregate supply. Although the three models of aggregate supply differ in their assumptions and emphases, their implications for aggregate output are similar.All can be summa￾rized by the equation Y =Y − + a(P − Pe ). This equation states that deviations of output from the natural rate are related to deviations of the price level from the expected price level.If the price level is higher than the expected price level, output exceeds its natural rate. If the price level is lower than the expected price level, output falls short of its natural rate. Figure 13-3 graphs this equation. Notice that the short-run aggregate supply curve is drawn for a given expectation Pe and that a change in Pe would shift the curve. Now that we have a better understanding of aggregate supply, let’s put ag￾gregate supply and aggregate demand back together. Figure 13-4 uses our ag￾gregate supply equation to show how the economy responds to an unexpected increase in aggregate demand attributable, say, to an unexpected monetary ex￾pansion. In the short run, the equilibrium moves from point A to point B. The increase in aggregate demand raises the actual price level from P1 to P2. Because people did not expect this increase in the price level, the expected price level remains at P2 e , and output rises from Y1 to Y2, which is above the natural rate Y −. Thus, the unexpected expansion in aggregate demand causes the economy to boom. CHAPTER 13 Aggregate Supply | 357 figure 13-3 Price level, P Income, output, Y P = Pe P > Pe P < Pe Y
Y a(P  Pe ) Y Short-run aggregate supply Long-run aggregate supply The Short-Run Aggregate Supply Curve Output deviates from the natural rate Y − if the price level P deviates from the expected price level Pe .