Post on 23-Dec-2015
The AD AS Equilibrium &Long Run Aggregate Supply
Equilibrium: Real Output and the Price Level
• The intersection of the aggregate demand curve AD and the aggregate supply curve AS establishes the economy's equilibrium price level and equilibrium real output.
An Increase in Aggregate Demand:How Does it Affect P* and Q* (Equilibrium)
• If households, businesses, or governments increase spending.
• This is due to a positive change in the determinants of Ig, C, or Xn.
• G could increase based on need.
• Review the DETERMINANTS.
Price Level Changes (Inflation) can Hinder Output (GDP) Growth.
• Notice that if AS was perfectly horizontal (excess resources available. ie. Unemployment and capacity), output would have increased all the way to GDP1.
• Rising prices hinder growth and leave us at GDP2.
Full Employment and Price Level Stability
• At Full Employment, increases in AD should result in inflation because we have an upward sloping AS curve.
• However, a shift in the Aggregate Supply Curve could offset the rise in price level and result in increased output.
• What factors (determinants) could increase AS to help moderate inflation?
Key Questions 6 & 7
• Important for Test and Exam Preparation. • Review and seek clarification on concepts if
necessary.• It is important to familiarize yourself with the
lists of AD and AS determinants.
The Short-Run vs. The Long-Run
• The Short-Run: A period in which input/resource prices remain fixed while the general price level changes.
• Considerable time can pass before inflation results in increased wages for workers.
• People can be unaware of the “real” wage.
The Short-Run vs. The Long-Run
• The Long-Run: Resource prices including wages are responsive to changes in the general price level.
• The Long-Run Aggregate Supply Curve is vertical at the full-employment level of Real GDP.
• As prices move higher, workers demand higher wages. This shifts AS left, and vice versa. Leaving us back at the same level of output.
Short-Run AS and Long-Run As
Equilibrium and Full Employment GDP
• The LRAS Curve represents the economy’s full employment or potential GDP.
• The equilibrium is where the AD curve intersects the LRAS curve.
• In the short-run, the economy can be at a point of undesirable unemployment or inflation, but it should rest back to equilibrium.
Inflationary and Recessionary Gaps
Test and Exam Preparation
• Questions 8,9,10, and 11 on pages 251-252.