Ch 7 Aggregate Demand and Supply.ppt

Ch. 7: Aggregate Demand and Supply Aggregate supply Aggregate demand Macroeconomic equilibrium. Effects of changes in aggregate supply and aggregate demand on economic growth, inflation, and business cycles Explain U.S. economic growth, inflation, and business cycles by using the AS-AD model. Aggregate Supply Aggregate Supply Fundamentals Long-run aggregate supply Short-run aggregate supply Aggregate Supply Long-Run Aggregate Supply (LRAS) relationship between the quantity of real GDP supplied and the price level when real GDP equals potential GDP. Position of LRAS determined by Labor supply Labor demand Production function Aggregate Supply How will each of the following affect the position of the LAS curve? increase in labor supply Increase in labor demand Upward shift of the production function Aggregate Supply Short-Run Aggregate Supply (SRAS) The macroeconomic short run a period during which some prices have not adjusted to the long run equilibrium real GDP may fall below or rise above potential GDP. the unemployment rate may rise above or fall below the natural unemployment rate. SRAS is the relationship between the quantity of real GDP supplied and the price level in the short-run when the money wage rate, the prices of other resources, and potential GDP remain constant. Aggregate Supply Along the SAS curve, a rise in the price level with no change in the money wage rate and other input prices increases the quantity of real GDP supplied—the SAS curve is upward sloping. Aggregate Supply The SAS curve is upward sloping because: If money wage is fixed, as price level rises, real wage falls and firms hire more workers. If P=105 SAS=LAS labor market in equilibrium Unemployment rate=natural rate No pressure on real wages Aggregate Supply If P105 SASLAS real wage equilibrium Shortage of labor Unemplnatural rate Upward pressure on real wages If P105 SASLAS real wage equilibrium surplus of labor Unemplnatural rate Downward pressure on real wages