ECO102H1 Lecture 32: 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 !ī€ƒ$'ī€ƒ;ī€Œ
Shifts according to the multiplier theory
Review
3ī€ƒ9ī€ƒ !ī€ƒ ī€”ī€Œī€ƒKRXVHKROGī€ƒZHDOWKī€ƒ;ī€ƒ !ī€ƒ&ī€ƒ;
ī€•ī€Œī€ƒH[SRUWVī€ƒPRUHī€ƒH[SHQVLYHī€ƒ !ī€ƒ;ī€ƒ;
(for given exchange rate)
ī€–ī€Œī€ƒLPSRUWVī€ƒOHVVī€ƒH[SHQVLYHī€ƒ !ī€ƒ0ī€ƒ9ī€ƒ
(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: UHODWLRQī€ƒEHWZHHQī€ƒUHDOī€ƒ*'3ī€ƒī€‹ILUPĀ¶Vī€ƒGHVLUHGī€ƒSURGXFWLRQĀ“ī€ƒDQGī€ƒSULFHī€ƒOHYHOī€ƒwhen
prices of factors of production (including wages) are constant
2. Price level (P) 9ī€ƒ ī€ƒ65$6ī€ƒ9
,QWXLWLRQī€ī€ƒ3ī€ƒ9ī€ƒĆ† higher profits (since wages Ɔ ILUPVĀ¶ī€ƒGHVLUHGī€ƒ
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: UHODWLRQī€ƒEHWZHHQī€ƒUHDOī€ƒ*'3ī€ƒī€‹ILUPĀ¶Vī€ƒGHVLUHGī€ƒSURGXFWLRQī€Œī€ƒDQGī€ƒSULFHī€ƒOHYHOī€ƒZKHQī€ƒ
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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ECO102H1 Full Course Notes
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