ECN 204 Lecture Notes - Lecture 10: Aggregate Supply, Potential Output, Laffer Curve
Document Summary
Explain how the economy arrives at its long-run equilibrium. Explain how to apply the long-run ad as model to explain inflation, recessions, and growth. Explain the short-run trade-off between inflation and unemployment (the phillips curve). Discuss why there is no long-run trade-off between inflation and unemployment. Explain the relationship among tax rates, tax revenues, and aggregate supply. 16. 1) from the short-run to the long run. Short-run aggregate supply: input prices are inflexible, aggregate supply curve is upwardly sloping. Long-run aggregate supply: input prices are fully flexible, vertical aggregate supply. From the short-run as to the long-run as: production above potential output: High demand for inputs: input prices rise, short run aggregate supply shifts left, return to potential output. Production below potential output: lower demand for inputs, input prices fall, short run aggregate supply shifts right, return to potential output. Sr & lr aggregate supply and equilibrium in the long-run ad-as model.