Macro Chapter 12 II – Flashcards
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The long-run aggregate supply (LRAS) curve
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shows the relationship between the aggregate price level and the quantity of aggregateoutput supplied that would exist if all prices, including nominal wages,were fully flexible.The long-run aggregate supply curve, LRAS, is vertical because changes inthe aggregate price level have no effect on aggregate output in the longrun.
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Potential output
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the level of real GDP the economy wouldproduce if all prices, including nominal wages, were fully flexible.The long-run aggregate supply curve is vertical at the level of potentialoutput. U.S. potential output has risen over time due to increases in physical and human capital, and technological progress.
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An increase in long-run aggregate supply
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shown by a rightward shift of the long-run aggregate supply curve.
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A decrease in long-run aggregate supply
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shown by a leftward shift of
the long-run aggregate supply curve.
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At any point in time, the economy
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is either operating on a short-run aggregate supply curve or on the long-run aggregate supply curve.
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If actual aggregate output exceeds potential aggregate output
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nominal wages will eventually rise in response to low unemployment, and aggregate output will fall, represented by a leftward shiftof the short-run aggregate supply curve.
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If potential aggregate output exceeds actual aggregate output
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nominal wages will eventually fall in response to high unemployment, and aggregateoutput will rise, represented by a rightward shift of the short-run aggregate supply curve.
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The AS-AD model
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uses the aggregate supply curve and the aggregate demand curveTogether to analyze economic fluctuations.
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The economy is in short-run macroeconomic equilibrium
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when the quantity of aggregate output supplied is equal to the quantity demanded.
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Theshort-run equilibrium aggregate price level
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theaggregate price level in the short-run macroeconomic equilibrium.Short-run equilibrium aggregate output is the quantity ofaggregate output produced in the short-run macroeconomic equilibrium.
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An event that shifts the aggregate demand curve
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is a demandshock
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A negative demand shock, such as the collapse of business or consumerconfidence,
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shifts the aggregate demand curve to the left, resulting in adecrease in the aggregate price level and a decrease in the equilibrium
level of aggregate output.
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A positive demand shock, such as an increase in consumer spending,
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shifts the aggregate demand curve to the right, resulting in an increase in the aggregate price level and an increase in the equilibrium level of aggregate output.
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An event that shifts the short-run aggregate supply curve
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is a supply shock.
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A negative supply shock, which increases firms' cost of production
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shifts the SRAS curve to the left, resulting in an increase in the equilibrium aggregate price level and a decrease in the equilibrium level of aggregate output.
