mctaggart_econ_6e_stud_lect_rev_ch24.pptVIP

Aggregate Supply QUANTITY SUPPLIED AND SUPPLY The quantity of real GDP supplied is the total quantity that firms plan to produce during a given period. Aggregate supply is the relationship between the quantity of real GDP supplied and the price level. We distinguish two time frames associated with different states of the labor market: Long-run aggregate supply Short-run aggregate supply Aggregate Supply LONG-RUN AGGREGATE SUPPLY Long-run aggregate supply is the relationship between the quantity of real GDP supplied and the price level when real GDP equals potential GDP. Potential GDP is independent of the price level. So the long-run aggregate supply curve (LAS) is vertical at potential GDP. Aggregate Supply SHORT-RUN AGGREGATE SUPPLY Short-run aggregate supply is the relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources, and potential GDP remain constant. A rise in the price level with no change in the money wage rate and other factor prices increases the quantity of real GDP supplied. The short-run aggregate supply curve (SAS) is upward sloping. Aggregate Supply Figure 24.1 shows the LAS curve. In the long run, the quantity of real GDP supplied is potential GDP. As the price level rises and the money wage rate change by the same percentage, the quantity of real GDP supplied remains at potential GDP. Aggregate Supply In the short run, the quantity of real GDP supplied increases if the price level rises. The SAS curve slopes upward. A rise in the price level with no change in the money wage rate induces firms to increase production. Aggregate Supply With a given money wage rate, the SAS curve cuts the LAS curve at potential GDP. The price level is 110. With the given money wage rate, as the price level falls below 110 ... the quantity of real GDP supplied decreases along the SAS curve. Aggregate Supply With the given money wage rate, as the price level falls below 110 … the quantity of