1. New Way to Depict Long Run Growth and Inflation A. Read 715 and follow Fig. 31-5 ….top pg. 716……but our purpose is to provide a framework for short run analysis. As we develop the short run model, we keep it simple by not showing the continuing growth and inflation depicted in fig 31-5. But always remember that long run trends provide the background for short run fluctuations. Short run fluctuations in output and the price level should be viewed as deviations from the continuing long run trends.

2. Why the AS Slopes Up in Short Run Three theories but all have a common theme: the Q of output supplied deviates from its long run or natural level when the price level deviates from the price level that people expected. When the price level rises above the expected level, output rises above its natural rate When the price level falls below the expected level, output falls below its natural rate. **Eventually, as people adjust their expectations, misperceptions are corrected, nominal wages adjust and prices adjust

3. – Why Short Run Agg Supply shifts (see table 31-2 p. 720) Same reasons as LRAS shifts But includes change in Price Level – be sure to read 719 (the key is how it is tied in with wages)