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The AD AS Equilibrium & Long Run Aggregate Supply.

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Presentation on theme: "The AD AS Equilibrium & Long Run Aggregate Supply."— Presentation transcript:

1 The AD AS Equilibrium & Long Run Aggregate Supply

2 Equilibrium: Real Output and the Price Level The intersection of the aggregate demand curve AD and the aggregate supply curve AS establishes the economy's equilibrium price level and equilibrium real output.

3 An Increase in Aggregate Demand: How Does it Affect P* and Q* (Equilibrium) If households, businesses, or governments increase spending. This is due to a positive change in the determinants of Ig, C, or Xn. G could increase based on need. Review the DETERMINANTS.

4 Price Level Changes (Inflation) can Hinder Output (GDP) Growth. Notice that if AS was perfectly horizontal (excess resources available. ie. Unemployment and capacity), output would have increased all the way to GDP1. Rising prices hinder growth and leave us at GDP2.

5 Full Employment and Price Level Stability At Full Employment, increases in AD should result in inflation because we have an upward sloping AS curve. However, a shift in the Aggregate Supply Curve could offset the rise in price level and result in increased output. What factors (determinants) could increase AS to help moderate inflation?

6 Key Questions 6 & 7 Important for Test and Exam Preparation. Review and seek clarification on concepts if necessary. It is important to familiarize yourself with the lists of AD and AS determinants.

7 The Short-Run vs. The Long-Run The Short-Run: A period in which input/resource prices remain fixed while the general price level changes. Considerable time can pass before inflation results in increased wages for workers. People can be unaware of the “real” wage.

8 The Short-Run vs. The Long-Run The Long-Run: Resource prices including wages are responsive to changes in the general price level. The Long-Run Aggregate Supply Curve is vertical at the full-employment level of Real GDP. As prices move higher, workers demand higher wages. This shifts AS left, and vice versa. Leaving us back at the same level of output.

9 Short-Run AS and Long-Run As

10 Equilibrium and Full Employment GDP The LRAS Curve represents the economy’s full employment or potential GDP. The equilibrium is where the AD curve intersects the LRAS curve. In the short-run, the economy can be at a point of undesirable unemployment or inflation, but it should rest back to equilibrium.

11 Inflationary and Recessionary Gaps

12 Test and Exam Preparation Questions 8,9,10, and 11 on pages 251-252.

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