Explain the mechanisms that underlie the relation between price level and output in aggregate supply. Illustrate the relation diagrammatically and then show and explain the impact of a reduction in the expected price level.
Answer ONLY ONE out of the two questions in this section (a) Present a model of the labour market and use its equilibrium to derive an aggregate supply relation of the form y, = y * +8(p, where 0 < B <1, y, is the level of output, y * is the natural level […]