1. Aggregate Supply & Demand Model Part 2
Long Run AS Curves

2. Using AS/AD Model How can you improve the current economy?
U.S. Economy
AS1
Price
Level
Real
GDP
AD1
AD2
Gov’t ↓ Taxes => consumer income ↑
C ↑ => AD ↑ => R-GDP ↑ P2 Y2 E2 P1 Y1 E1
Opportunity Cost?
Rising Gov’t Debt
(risk of crowding out)

3. PPF Review Illustrates the full potential of an economy AS1 AD1
On PPF Line means:
Unemployment low as possible (4.0%)
Jobs match human capital
Economy as efficient as possible
AS1
Price
Level
Real
GDP
AD1
AS/AD Model P1 Q1 E1

4. Aggregate Supply Curves
Short run curve (SRAS) is upward sloping
Long Run curve (LRAS) is vertical at full potential output

5. Full Potential Output
Level of Real GDP economy achieves in long run is based on a country’s full potential to produce goods/services
What determines full potential?

6. Short Run Equilibrium
In the short run an economy can be at, above, or below full potential
In theory, in the long run => economy must be at full potential
Full Potential Output Equilibrium
On PPF Curve
Unemployment low as possible
Jobs match human capital
Economy as efficient as possible

7. Full Potential Worksheet
Long Run Equilibrium P1 E1 Y1

8. Inflationary Gap Recessionary Gap Economy above full output
Economy below full output
LRAS1
Price
Level
Real
GDP
SRAS1
LRAS1
Price
Level
Real
GDP
SRAS1
AD1
AD1 P1 Y1 E1 P1 Y1 E1 Y* Y*
Unemployment high, real output low
Below PPF, idle resources
Unemployment very low, output high
Above PPF, no idle resources

9. How to produce more!
As PPF shifts right => full potential ↑ => LRAS shifts right