1. Aggregate Supply Short-Run Aggregate Supply and Long-Run Aggregate Supply

2. 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 14.0 6.0 A rise in the aggregate price level… …causes aggregate output supplied to rise in the short run. Why? Y1Y1 Y2Y2 Output

3. The “stickiness” of input prices—particularly labor Scenario 1: Demand is strong, products are selling like hotcakes (output is up), prices are up and so is profit per unit. But wages don’t increase immediately, as some contracted workers’ wages are fixed for now. EVENTUALLY, competition for workers becomes so fierce that wages are increase. But note—output and prices changed QUICKLY, but wages took longer to catch up. Scenario 2: Demand is weak, products won’t sell output is down), prices are down and so is profit per unit. But wages don’t decrease immediately, because some contracted workers’ wages are fixed for the time being. EVENTUALLY the labor market is so weak that wages fall. Note—the prices and output fell quickly, but wagers were slower to catch up. The Upward Slope of the Short-run Aggregate Supply Curve

4. 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

5. Shifters of the SRAS Curve

6. Aggregate Price Level Real GDP Long-Run Aggregate Supply Curve: Slope LRAS YPYP Potential output 14.0 6.0The 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?

7. 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 (including wages) are relatively low. In the long run, the economy’s actual aggregate output matches potential aggregate output.

8. 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 (including wages) are relatively high. In the long run, the economy’s actual aggregate output matches potential aggregate output.

9. How is Aggregate Supply (AS) affected? a.Brief (5 words) description of the scenario b.Movement along the curve OR shift in the curve (direction?) c.Provide a graph to illustrate, and CATEGORIZE THE SHIFT (if there is one) 1.Hackers from a foreign country disable most corporate computing systems. This disruption continues off and on for several months. 2.The price of grain, a key commodity, skyrockets as the nation switches to more biofuels as sources of energy. 3.The First Lady’s goal of doubling the fraction of high school seniors that graduate from college is successful. 4.Due to a weak economy, the consumer price index falls for several consecutive months. 5.Labor unions are successful in organizing members throughout the country and they negotiate higher wages and benefits.