Lecture 32-Aggregate Supply Curve

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1 Aug 2010
School
Department
Course
Professor
Thursday, February 18th, 2010.
Economic Facts
Year Unemployment Rate
1991 11.0%
2000 6.8%
Why?
Tools to Analyze
AD Schedule*
SRAS Schedule*
LRAS Schedule (Full-Employment Real GDP)
Lectures Text (Lipsey-Ragan)
SRAS AS
LRAS Potential Output
Review
1. Model
2. AD Schedule:
Slopes downward (P 9 !$';
Shifts according to the multiplier theory
Review
39! KRXVHKROGZHDOWK;!&;
H[SRUWVPRUHH[SHQVLYH !;;
(for given exchange rate)
LPSRUWVOHVVH[SHQVLYH !09
(for given exchange rate)
Result
As price level rises, Aggregate Demand (AD) falls
SRAS
AD
Y
P
P = Price Level
Y = real GDP
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3. Next Step:
SRAS (short-run aggregate supply schedule)
LRAS (long-run aggregate supply schedule)
Short-Run Aggregate Supply (SRAS)
1. SRAS: UHODWLRQEHWZHHQUHDO*'3ILUP¶VGHVLUHGSURGXFWLRQ´DQGSULFHOHYHOwhen
prices of factors of production (including wages) are constant
2. Price level (P) 965$69
,QWXLWLRQ39Æ higher profits (since wages Æ ILUPV¶GHVLUHG
and prices of other factors of production level
production do not change) increases
SRAS
POTENTIAL GDP is total output when factors of production are utilized at normal rates
Long-Run Aggregate Supply (LRAS)
1. LRAS: UHODWLRQEHWZHHQUHDO*'3ILUP¶VGHVLUHGSURGXFWLRQDQGSULFHOHYHOZKHQ
prices of factors of production (including wages) change in same proportion
LRAS: Potential GDP
2. LRAS is vertical because POTENTIAL GDP does not vary with price level
(Potential GDP is total output when factors of production are utilized at normal rates)
SRAS
Real GDP (National Income)
Price
Level
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