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Chapter 8

ECO105Y1 Chapter 8: MACRO

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8.1 Potential GDP and LR Aggregate Supply
- Long-Run Aggregate Supply
- Similar to potential GDP
- The Quantity of real GDP supplied when all inputs employed
- Represents potential GDP and full employment
- Long-Run vs Short-Run
- Long Run: period of time long enough for all prices/wages to adjust to Smith’s
invisible hand
- Short Run: period of time where some input prices dont change
- Not defined by calendar time
- LRAS: Full-employment outcome of co-ordinated smart choices
8.2 Short-Run Aggregate Supply
- SRAS: quantity of real GDP macroecon players plan to supply at different price levels
- Upward sloping, since input prices are fixed in short run
- When prices rise, higher output prices with fixed input → more profit
- Increase quantity supplied of real GDP
- SRAS and LRAS intersect at point where SRAS hits potential GDP
- Law of SRAS: as prices rise, aggregate quantity supplied of real GDP increases
- Supply Plans to Increase Inputs
- Increase in Potential GDP & Aggregate Supply
- Anything that increases quality/quantity of inputs will increase potential
- Change in Input Price and Aggregate Supply
- Rise in input prices decreases SRAS, shifts leftward
- Does not change potential GDP, so LRAS does not shift
- Supply Shocks
- Negative Shocks
- Natural disasters/energy price increases etc.
- Shift SRAS leftward (Due to increased costs)
- Opposite for positive
8.3 Aggregate Demand
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