• Equilibrium price level is P0 • Observed price level in the economy at particular point in time
AS, AD, and Equilibrium
• Shifts in either the AS or AD schedule results in a change in the equilibrium level of prices and output
• The growth theory models described in earlier chapters explain the level of Y* in a particular period
• Y* is “exogenous with respect to the price level”
[Insert ly Curve
• The classical supply curve is vertical, indicating that the same amount of goods will be supplied, regardless of price [Figure 5-4 (b)]
• Natural rate of unemployment is the rate of unemployment arising from normal labor market frictions that exist when the labor market is in equilibrium
Long run version of the AS curve
[Insert Figure 5-4 here]
Classical Supply Curve
