ECON102 Lecture Notes - Lecture 7: Aggregate Demand, Aggregate Supply, Potential Output
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The quantity of real gdp supplied is the total quantity that firms plan to produce during a given period. Aggregate supply is the relationship between the quantity of real gdp supplied and the price level. We distinguish two time frames associated with different states of the labour market: long-run aggregate supply, short-run aggregate supply. Long-run aggregate supply is the relationship between the quantity of real gdp supplied and the price level when real gdp equals potential gdp. Potential gdp is independent of the price level. So the long-run aggregate supply curve (las) is vertical at potential gdp. Short-run aggregate supply is the relationship between the quantity of real gdp supplied and the price level when the money wage rate, the prices of other resources, and potential gdp remain constant. A rise in the price level with no change in the money wage rate and other factor prices increases the quantity of real gdp supplied.