Extending the Analysis of Aggregate supply (Unit 5)

Extending the Analysis of Aggregate supply

• SRAS: in macroeconomics this is the period in which wages (and other input price) remain fixed as price level increase or decreases.
• LRAS: period of time in which wages have become fully responsive to changes in price level.

Effect over Short - Run

• In the short run, price level changes allow for companies to exceed normal outputs and hire more workers because profit are increasing while wage remain constant
• In the level long run wages will adjust to the price level and previous output levels will adjust accordingly.

 

Equilibrium in the extended model

• The extended model means the inclusion of both the short run and LRAS come.
• The long aggregate supply curve is represented with a vertical line @ full employment.

 

Demand pull inflation

• Demand pull - price increase based on increase in aggregate demand.
• In the short run, demand pull will drive up prices, and increase production.
•  In the long run, increase in aggregate demand  will eventually return to previous levels.

 

Cash push & the extended model

• Cost - push arises from factor that will increase per unit costs such as increase in the price of a key resource.

 

Dilemma for the Gov't

 

• In an effort to fight cost - push, the gov't can react in two different ways.
• Action such as spending by the gov't could begin an inflationary spiral.
• No action however  could lead to recession by keeping product and employment levels declining.

 

 

• LR Phillips curve

 

 

 

• Natural rate of unemployment is held constant.

• Because the LRPC exists at the natural rate of unemployment, structural change in the economy that affect unemployment will also cause the LRPC to shift.
• Increase in unemployment shift LRPC to the right
• Decrease in unemployment shift LRPC to the left