AGGREGATE DEMAND AND AGGREGATE SUPPLY
275
AS
curve when price expectations are
p
0
e
at point M to the left of the natural
rate of output
Y*
(see Figure 9.6, panel D). At point M, workers have expected
a price higher than the realized price,
p
0
e
p
1
,
and they realize a nominal wage
w
1
(depicted in panel A) that is lower than what would have been realized (
w
0
)
if expectations had been correct. With mistaken expectations, employment and
output are lower than the natural rate of employment and output,
Y
1
Y *.
As workers adapt to this outcome, they will revise their expectation of prices
downwards, and ...
Get Macroeconomics, 2nd Edition by Pearson now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.
