Unit Five: Extending the Analysis of Aggregate Supply

Extending the Analysis of Aggregate Supply

Notes from 4/7/16

Short Run Aggregate Supply- Period in which wages remain fixed as price level increases or decreases

Effects over Short Run

-In Short Run (SR), price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant

-In Long Run (LR), wages will adjust to the price level and previous output levels will adjust accordingly

Equilibrium in the Extended Model

Extended Model- The inclusion of both the short run and long run aggregate supply curves

-The LRAS curve is represented with a vertical line at full employment

Demand Pull Inflation- Prices increase based on increase in AD

-In SR, demand pull will drive up prices and increase production

-In LR, increases in AD will eventually return to previous levels

Cost Push- Arises from factors that will increase per unit costs such as increase in the price of a key source

Dilemma for the Government

-In an effort to fight cost push inflation, the government can react in two different ways

-Action such as spending by the government could begin an inflationary spiral

-No action could lead to recession by keeping production and employment levels declining

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