Macroeconomics/Aggregate Supply

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Aggregate supply is the relation between the price level of the economy and the production of the economy. This relationship shows how the production Y affects the price level of the economy. That means if the GDP increase or decrease what happens in the variable P. The form of the aggregate supply depends from the time. In the short run the equation which describes the aggregate supply is the following


                                Y = Y* + α·(P-Pe)


where Y is the production of economy that means Y = GDP, Y* = GDP* is the natural level of production for economy, coefficient α is always positive α>0, P is the price level and Pe is the expected price level from the consumers. The curve of the previous equation has upward slope. In the long run the price is equal to the expected level of price so the equation in the long run is


                                 Y = Y*