Worth: Mankiw Economics 5e HAPTER 9 Introduction to Economic Fluctuations 245 The opposite occurs if the Fed increases the money supply. The quantity equation tells us that an increase in M leads to an increase in PY. For any giv ven price level, the amount of output is higher, and for any gi Iven amou unt of the price level is higher. As shown in Figure 9-3(b), the aggregate demand curve shifts outward Fluctuations in the money supply are not the only source of fluctuations in aggregate demand. Even if the money supply is held constant, the aggregate de- mand curve shifts if some event causes a change in the velocity of money. Over the next three chapters, we consider many possible reasons for shifts in the aggre- ate demand curve 9-3 Aggregate Supply By itself, the aggregate demand curve does not tell us the price level or the amount of output; it merely gives a relationship between these two variables To accompany the aggregate demand curve, we need another relationship between P and Y that crosses the aggregate demand curve- an aggregate supply curve. The aggregate demand and aggregate supply curves together pin down the economys price level and quantity of output. Aggregate supply(AS)is the relationship between the quantity of goods and services supplied and the price level. Because the firms that supply goods and services have fexible prices in the long run but sticky prices in the short run, the aggregate supply relationship depends on the time horizon. We need to discuss two different aggregate supply curves: the long-run aggregate supply curve LRAS and the short-run aggregate supply curve SRAS. We also need to discuss how the economy makes the transition from the short run to the long run. The Long Run: The Vertical Aggregate Supply Curve Because the classical model describes how the economy behaves in the long run, we derive the long-run aggregate supply curve from the classical model. Recall from Chapter 3 that the amount of output produced depends on the fixed amounts of capital and labor and on the available technology. To show his. we write Y=F(K, L) According to the classical model, output does not depend on the price level. To show that output is the same for all price levels, we draw a vertical aggregate supply curve, as in Figure 9-4. The intersection of the aggregate demand curve with this vertical aggregate supply curve determines the price level f If the aggregate supply curve is vertical, then changes in aggregate demand af- ct prices but not output. For example, if the money supply falls, the aggregate wed,Feb13,200210:084User JOEWA:Job EFF01425:6264_ch09:Pg 245:27137#/eps at 100% *27137* Wed, Feb 13, 2002 10:08 AM The opposite occurs if the Fed increases the money supply. The quantity equation tells us that an increase in M leads to an increase in PY. For any given price level, the amount of output is higher, and for any given amount of output, the price level is higher.As shown in Figure 9-3(b), the aggregate demand curve shifts outward. Fluctuations in the money supply are not the only source of fluctuations in aggregate demand. Even if the money supply is held constant, the aggregate de￾mand curve shifts if some event causes a change in the velocity of money. Over the next three chapters, we consider many possible reasons for shifts in the aggre￾gate demand curve. 9-3 Aggregate Supply By itself, the aggregate demand curve does not tell us the price level or the amount of output; it merely gives a relationship between these two variables.To accompany the aggregate demand curve, we need another relationship between P and Y that crosses the aggregate demand curve—an aggregate supply curve. The aggregate demand and aggregate supply curves together pin down the economy’s price level and quantity of output. Aggregate supply (AS) is the relationship between the quantity of goods and services supplied and the price level. Because the firms that supply goods and services have flexible prices in the long run but sticky prices in the short run, the aggregate supply relationship depends on the time horizon.We need to discuss two different aggregate supply curves: the long-run aggregate supply curve LRAS and the short-run aggregate supply curve SRAS.We also need to discuss how the economy makes the transition from the short run to the long run. The Long Run: The Vertical Aggregate Supply Curve Because the classical model describes how the economy behaves in the long run, we derive the long-run aggregate supply curve from the classical model. Recall from Chapter 3 that the amount of output produced depends on the fixed amounts of capital and labor and on the available technology. To show this, we write Y = F(K _ , L _ ) = Y _ . According to the classical model, output does not depend on the price level.To show that output is the same for all price levels, we draw a vertical aggregate supply curve, as in Figure 9-4.The intersection of the aggregate demand curve with this vertical aggregate supply curve determines the price level. If the aggregate supply curve is vertical, then changes in aggregate demand af￾fect prices but not output. For example, if the money supply falls, the aggregate CHAPTER 9 Introduction to Economic Fluctuations | 245