Saturday, May 14, 2016

Unit 5 Extending the Analysis of Aggregate Supply (4-7-16)

Unit 5

Extending the Analysis of AS

In macroeconomics, this is the period in which wages (and other input prices) remain fixed as price level increases or decreases.


 Long Run Aggregate Supply
  • Period of time in which wages have become fully responsive to changes in price level.

Effects over Short-Run
  • In the short run, price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant.

  • In the long run, wages will adjust to the price level and previous output levels will adjust accordingly.

Equilibrium in the Extended Model
  • The long run AS Curve is represented with a vertical line at full employment level of real GDP.

Demand Pull Inflation
  • Demand pull- prices increases based on an increase in aggregate demand.

  • In the short run, demand pull will drive up prices, and increase production.

  • In the long run, increases in aggregate demand will eventually return to previous levels.

Cost push & the Extended Model
  • Cost push inflation arises from factors that will increase per unit costs such as increases in the price of a key resource.

Dilemma for the Government
  • In an effort to fight cost-push, the government can react.

  • Action such as spending by the government could begin an inflationary spiral.

  • No action however could lead to a recession by keeping production and employment levels declining.

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