Extending
the analysis of Aggregate Supply
SRAS
In macroeconomics this is the
period in which wages and other input prices remain fixed as price level increases
or decreases. Remember how crucial worker salaries to a businesses output
to bottom line when considering effects of aggregate supply.
LRAS
Period of time in which wages have become fully responsive to changes in price level. Remember how crucial worker salaries to a businesses output to bottom line when considering effects on AS.
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
Equilibrium in the extended model
·
The extended model means the inclusion of both
the short run and AS curves.
·
The long AS curve is represented with a vertical
line at full employment level of real GDP.
Demand pull inflation in the AS model
-
Demand pull: prices increase based on
increase in Aggregate demand.
-
In the short run, demand pull will drive up
prices and increase production.
-
In the long run, increase in aggregate demand
will eventually return to previous levels.
Cost
push and extended models
-
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.
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