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The AD AS Equilibrium & Long Run Aggregate Supply

The AD AS Equilibrium & Long Run Aggregate Supply. Equilibrium: Real Output and the Price Level. The intersection of the aggregate demand curve AD and the aggregate supply curve AS establishes the economy's equilibrium price level and equilibrium real output.

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The AD AS Equilibrium & Long Run Aggregate Supply

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  1. The AD AS Equilibrium &Long Run Aggregate Supply

  2. Equilibrium: Real Output and the Price Level • The intersection of the aggregate demand curve AD and the aggregate supply curve AS establishes the economy's equilibrium price level and equilibrium real output.

  3. An Increase in Aggregate Demand:How Does it Affect P* and Q* (Equilibrium) • If households, businesses, or governments increase spending. • This is due to a positive change in the determinants of Ig, C, or Xn. • G could increase based on need. • Review the DETERMINANTS.

  4. Price Level Changes (Inflation) can Hinder Output (GDP) Growth. • Notice that if AS was perfectly horizontal (excess resources available. ie. Unemployment and capacity), output would have increased all the way to GDP1. • Rising prices hinder growth and leave us at GDP2.

  5. Full Employment and Price Level Stability • At Full Employment, increases in AD should result in inflation because we have an upward sloping AS curve. • However, a shift in the Aggregate Supply Curve could offset the rise in price level and result in increased output. • What factors (determinants) could increase AS to help moderate inflation?

  6. Key Questions 6 & 7 • Important for Test and Exam Preparation. • Review and seek clarification on concepts if necessary. • It is important to familiarize yourself with the lists of AD and AS determinants.

  7. The Short-Run vs. The Long-Run • The Short-Run: A period in which input/resource prices remain fixed while the general price level changes. • Considerable time can pass before inflation results in increased wages for workers. • People can be unaware of the “real” wage.

  8. The Short-Run vs. The Long-Run • The Long-Run: Resource prices including wages are responsive to changes in the general price level. • The Long-Run Aggregate Supply Curve is vertical at the full-employment level of Real GDP. • As prices move higher, workers demand higher wages. This shifts AS left, and vice versa. Leaving us back at the same level of output.

  9. Short-Run AS and Long-Run As

  10. Equilibrium and Full Employment GDP • The LRAS Curve represents the economy’s full employment or potential GDP. • The equilibrium is where the AD curve intersects the LRAS curve. • In the short-run, the economy can be at a point of undesirable unemployment or inflation, but it should rest back to equilibrium.

  11. Inflationary and Recessionary Gaps

  12. Test and Exam Preparation • Questions 8,9,10, and 11 on pages 251-252.

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