4/7/16
Short Run Aggregate Supply
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 level will adjust accordingly.
Equilibrium in the Extended Model
The Long AS Curve is represented with a vertical at full employment level of real GDP
Demand Pull Inflation in the AS Model
-Demand-pull: Prices increase based on the 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 arises from factors that will increase per unit costs such as increase in the price of a key resource
Dilemma for the Government
-In an effort to fight cost-push, the government can react in two different ways.
-Action such as spending by the government could begin an inflationary spiral
-No action, however, could lead to recession by keeping production and employment levels declining
Fun fact: One aspect of this ex-tension is that the relative price that appears in commodity supply and demand functions becomes an anticipated real rate of return on earning assets, rather than a ratio of actual to expected prices.
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