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Chapter 26

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Department
Economics
Course
Economics 2139F/G
Professor
Bruce Hammond
Semester
Spring

Description
Chapter 26 Aggregate Supply and Aggregate Demand Aggregate SupplyLongrun aggregate supply is the relationship between the quantity of real GDP supplied and the price level when the money wage rate changes in step with the price level to achieve full employment o The quantity of real GDP supplied is the total quantity of goods and services valued in constant dollars that firms plan to produce during a given time periodPotential GDP is the quantity of GDP at full employmentSo the longrun aggregate supply curve is the relationship between the quantity of real GDP supplied and the price level in the long run when real GDP equals potential GDPA movement along the LAS curve means that two sets of prices are changing o The price level o The money wage rate and other resource pricesBecause both the price level and resource prices change the real factor prices remain constantFor example the real wage is constantThe real wage rate remains at the level that achieves full employment of labourThe shortrun aggregate supply curve is the relationship between the quantity of real GDP supplied and the price level in the short run when the money wage rate the prices of other resources and potential GDP remain constantThe figure shows a longrun aggregate supply curve and a shortrun aggregate supply curve The shortrun aggregate supply curve SAS is upward sloping At a price level of 100 the quantity of real GDP supplied is 1100 billion At a price level of 110 the quantity of real GDP supplied is 1200 billion which equals potential GDP The SAS curve slopes upward because when the price level rises with a constant money wage rate the real wage falls With a lower real wage firms make a larger profit by producing a larger output The figure shows the effect of price levelchanges on the LAS curve and the SAS curve A rise in both the price level and the money wage rate that maintains full employment brings a movement along the LAS curve
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