The equation representing aggregate supply captures the price-setting behaviour of firms, resulting from profit-maximisation under the obstacle of some sort of nominal price rigidity. Owing to this rigidity, firms have to take into account the expected development of prices in the next period when setting their prices today.
In its most basic form, this equation is known as the “New-Keynesian Phillips curve” which expresses current inflation πt as a function of currently expected inflation for the next period Et(πt+1) and the current output gap xt: 4  πt = β·Et(πt+1) + κ· xt.