ECON 10/9 - Ch. 8 Aggregate Supply

Ch. 5 - Consumption is a function of income
Ch. 6 - Money demand is a function of interest rates (and income)
Ch. 7 - Aggregate Demand
Ch. 8 - Aggregate Supply

Wage Ridgity: The Keynesian View of Labor Markets:
- Keynes held a contractual view of labor markets
- Contracts, implicit and explicit, prevent the labor market from fully adjusting to the changes in demand and supply
- With incomplete adjustment in labor markets, the aggregate supply function will not be vertical
- Chart in book about GB: classical wage flexibility isn't supported, wage rigidity is better supported when wages are needed to decrease

Figure 8-6:
- Keynesian Aggregate Supply when money wage is fixed
- Employment goes down as labor demand goes down and wages are fixed
- As demand and employment falls, output falls
- Aggregate price level falls with the fall in output

Flexible Price, Variable Wage Model:
- Wages do not fall as much as prices

3 Key Ideas to Keynesian Analysis:
- Consumption Function
- Speculative Demand for Money
- Imperfect Flexibility of Money

Aggregate Supply on Prices and Output:
- Prices rise and output falls when aggregate supply will decreases
- Aggregate supply shifts are called cost-push
- Changes in costs or technology affect aggregate supply
- Oil prices in late 07 and early 08 were cost-push effects from a reduced supply of oil

Demand-Pull:
- Supply and Output are moving together is cost-push*
- Supply and Output moving separately is demand-pull*