Aggregate Supply Short-Run Aggregate Supply and Long-Run Aggregate Supply

Short-Run Aggregate Supply Curve: Slope SRAS 1 The short-run aggregate supply curve, SRAS, is upward sloping. Why? (Think of wages). Aggregate Price Level Real GDP A rise in the aggregate price level… …causes aggregate output supplied to rise in the short run. Why? Y1Y1 Y2Y2 Output

Short-Run Aggregate Supply Curve: Shifts in the Curve Left shift of the aggregate supply curve = decrease in supply Right shift of the aggregate supply curve = increase in supply SRAS 1 SRAS 2 SRAS 3 The short-run aggregate supply curve is upward sloping. What causes shifts in the short-run aggregate supply curve? How do those causes affect the curve (left or right shift)? Aggregate Price Level Real GDP

Aggregate Price Level Real GDP Long-Run Aggregate Supply Curve: Slope LRAS YPYP Potential output The long-run aggregate supply curve, LRAS, is vertical. Why? (Think about wages again, over time). A rise in the aggregate price level… …leaves the quantity of aggregate output supplied unchanged in the long run. Why?

Leftward Shift of Short-Run Aggregate Supply Curve Initially, low wages have suppliers ramping up production above potential output… SRAS 1 SRAS 2 Aggregate Price Level Real GDP LRAS YPYP A1A1 P1P1 Y1Y1 …but over time, low unemployment from this increased production drives up nominal wages, which shifts SRAS to the left. Suppose that aggregate prices are relatively low. In the long run, the economy’s actual aggregate output matches potential aggregate output.

Rightward Shift of Short-Run Aggregate Supply Curve Initially, high wages have suppliers keeping production below potential output… SRAS 1 SRAS 2 Aggregate Price Level Real GDP LRAS YPYP A1A1 P1P1 Y1Y1 …but over time, high unemployment from this decreased production drives down nominal wages, which shifts SRAS to the right. Suppose that aggregate prices are relatively high. In the long run, the economy’s actual aggregate output matches potential aggregate output.