Hello! Would be glad to receive help on this macroeconomics question. So, we kno

Question

Hello!

Would be glad to receive help on this macroeconomics question.

So, we know that the Aggregate Supply equation is P-Pe = (Y-Y* ) and is its slope. Our professor derived = Pe  (/AL)(1+m) where AL is productivity times labor, is sensitiveness of wages to unemployment,Pe is expected price level and m is markup. So, all these components make up the AS slope, .

Could someone please explain to me how these factors (components) affect the slope ? (i.e. why does an increase in m, increases the slope, makes it steeper?)

Thank you!

Explanation / Answer

= Pe  (/AL)(1+m)

Expected price level, Pe: As Pe increases the slope of AS increases, which means that as expected price level increases the AS in the economy also increases, Thus a positive relationship exists between slope of AS, , which also mean a positive relationship between AS and Pe. Makes AS steeper.

: sensitivity of wages to unemployment. This is also directly related to the slope of AS and thus AS. AN increase in the , would mean that more are the wages sensitive to unemployment rate, higher will be the slope of AS, . This is because higher sensitivity of wages to unemployment rate increases volatility in the AS. Makes AS steeper.

AL: Productivity times Labor is inversely related to AS. This is because increase in AL leads to increase in unemployment. Less workers with higher productivity enough than hure number of workers with low productivity. Makes AS flatter.

m: Markup. Direct relationship. Higher the markup or ability of the producers to charge price above the Marginal post, higher is the slope of AS, . Makes AS steeper.

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