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Aggregate Supply

Aggregate Supply. Features of Macroeconomic performance: Growth potential GDP. Inflation. Business cycle fluctuation. Aggregate Supply Fundamental. The quantity of labor (L). The Qty. of Capital (K). The state of Technology (T).

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Aggregate Supply

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  1. Aggregate Supply • Features of Macroeconomic performance: • Growth potential GDP. • Inflation. • Business cycle fluctuation. • Aggregate Supply Fundamental. • The quantity of labor (L). • The Qty. of Capital (K). • The state of Technology (T).

  2. The model uses the concepts of aggregate supplyand aggregate demand to determine real GDP and the price level (the GDP deflator). • At any given time, the Qty of capital and the state of Technology are fixed. • The Population is fixed. • Qty. of Labor not Fixed.

  3. Labor Market can be any of the states: • At Full Employment. • Above Full employment. • Below Full employment. • The unemployment rate at full employment is called natural rate of employment.

  4. The Qty of real GDP at full employment is potential GDP, which depends on the: • Full employment Qty of labor. • The Qty o Capital. • The states of Technology. • Over the business cycle, -employment fluctuates around full employment and real GDP fluctuates around potential GDP.

  5. The Macroeconomic long run is a time frame that is sufficiently long for these forces to have done their work so that real GDP equals potential GDP and full employment prevails. • Long-run aggregate curve is the relation between the Qty of real GDP supplied and the price level in the long run when real GDP equals potential GDP.

  6. Long Run Aggregate Supply Price level LAS • Potential GDP is independent of the price level., so the LAS curve is vertical at potential GDP Potential GDP Real GDP

  7. Short-Run Aggregate Supply • Explanation: the macroeconomics short run is a period during which some money prices are sticky and real GDP might be below, above, or potential GDP and the unemployment rate might be above, below, or the natural rate of unemployment. Price Level E D Real GDP above positional GDP C B Real GDP below positional GDP A Real GDP

  8. Short-Run Aggregate Supply(Curve Explanation) • The short run aggregate supply curve shows the relationship between the Qty and real GDP supplied and price level when the money wages rate, other resource prices, and potential GDP remain the same. • This curve is upward-slopping because firm’s cost increases as the rate of output increases. • If the price level is greater than 105, real GDP is less than potential GDP.

  9. Movements Along the LAS & SAS Curves • When the price level, the money wages rate, and other resource prices rice by the same percentage, relative prices remain constant and real GDP remains at the potential GDP. There is a movement alongthe LAS curve. SAS LAS Price Level Price level rises and money wages rate is unchanged Price level rises & money wages rate by the same % Real GDP

  10. Movements Along the LAS & SAS Curves (Curve Explanation) • A rise in the price level with no change In the money wage rate and another resource prices brings an increase in the Qty. of real GDP supplied and a movement along the short run aggregate supply curve SAS • A rise in the price level with equal % increases in the money wage rate & other resource price keeps the Qty of real GDP supplied constant at potential GDP & brings a movement along the long-run aggregate supply curve, LAS.

  11. Change in money wages rate(Curve Explanation) • A rise in the money wage rate deceases short-run aggregate supply and shifts the short run aggregate supply curve leftward. A rise in the money wage rate does not change potential GDP, so the long run aggregate supply curve soes not shift.

  12. Aggregate Demand factors • The price level • Expectation • Fiscal policy and monitory policy • The world economy

  13. The wealth Effect: When the price level rises but other things remain the same, real wealth decreases. • Real Wealth: is the amount of money in the bank, bonds, stocks, and other assets that people own, measured not in dollars but in the terms of the goods and services that this money, bonds, and stock will buy.

  14. Qty of real GDP demands: is the total amount of final goods and Services produced in the USA that ppl, bznz, Governmental & foreigners plan to buy.

  15. Aggregate Demand • Dec. • Expected future income, inflation or profit Dec. • Fiscal Policy Dec government purchases, inc taxes, or Dec transfer payment. • Monetary policy Dec. the Qty of money and inc interest rates. • The exchange rate inc. or foreign income Dec.

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