Consider the AD-AS model in a closed economy. Firms are perfectly competitive and the price level P is flexible. Output Y is produced according to the production function Y = F(L), where L is employment. Employment is chosen by firms to maximize profits.

Assume nominal wages W are contractually fixed at W = W, and that workers' desired labour supply (which increases with the real wage) is greater than firms' labour demand at the fixed nominal wage.

(a) Assume the marginal product of labour is diminishing. Using a diagram to represent the labour market, show how the short-run aggregate supply curve is derived.

(b) Use the AD-AS model to find the effects of a decrease in the money supply on GDP, prices, and unemployment. Are the predictions of the model consistent with Okun's law?