Unit 5: Analyzing Aggregate Supply

Short Run Aggregate Supply /SRAS

This is the period in which wages (and other input prices) remain fixed as price level increases or decreases.

Long Run Aggregate Supply /LRAS

Period of time in which wages have become fully responsive to changes in price level.

Effects over Short-Run

In the short run, price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant.

In the long run, wages will adjust to the price level and previous output levels will adjust accordingly.

Equilibrium in the Extended Model

The long run AS Curve is represented with a vertical line at full employment level of real GDP.

Demand Pull Inflation

Demand pull- prices increases based on an increase in aggregate demand or AD.

In the short run, demand pull will drive up prices, and increase production.

In the long run, increases in aggregate demand will eventually return to previous levels.

Cost push & the Extended Model

Cost push inflation arises from factors that will increase per unit costs such as increases in the price of a key resource.

Dilemma for the Government

In an effort to fight cost-push, the government can react.

• Action such as spending by the government could begin an inflationary spiral.
• No action however could lead to a recession by keeping production and employment levels declining.