Chapter 7 Aggregate Demand and Aggregate Supply Hossain: MSMC
Aggregate Supply (AS) Curve • In our last class we saw that Aggregate Demand (AD) curve is a relationship between • Price level and • Real GDP (RGDP) • This relationship is negative because of three effects: • Wealth Effects • Interest Rate Effects • International Trade Effects
Aggregate Supply (AS) Curve • This negative relationship means, • When Price level rises, RGDP falls and • When Price level falls, RGDP rises • This negative relationship generates a downward sloping AD curve.
Aggregate Supply (AS) Curve • Aggregate Supply (AS) is a relationship between: • Price level and • RGDP produced at each price level
Short and Long Run The Short Run • A time period in which wages and some other prices are sticky (slow to adjust) • They do not respond to changes in economic conditions • In a short run equilibrium, market does not clear
Short and Long Run Sticky Price • Price that is slow to adjust to its equilibrium level • Creating sustained periods of shortage or surplus • Stickiness of price determines the length of the short run
Short and Long Run The Long Run • The long run in macroeconomic analysis, is a period in which wages and prices are flexible. • Here, price level acts as an adjustment mechanism that restores the equilibrium • In equilibrium,