UVA ECON 2020 - 9-26-2012Handout (6 pages)

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9-26-2012Handout



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9-26-2012Handout

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Pages:
6
School:
University Of Virginia
Course:
Econ 2020 - Principles of Economics: Macroeconomics

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Aggregate Supply Aggregate Supply Elias Yannopoulos September 26 2012 Elias Yannopoulos Aggregate Supply Aggregate Supply Thinking About Supply Resources workers capital materials Firms Output goods services The firm cares about two groups of prices resource prices wages interest rates input prices and output prices How do firms respond when the price level increases There are two possible responses Increase output Do not change output If input and output prices increase together then there should be no change in output If only output prices rise then firms should increase output What happens to supply when the price level changes Elias Yannopoulos Aggregate Supply Aggregate Supply Slope of Aggregate Supply Long Run Enough time for all prices to adjust Short Run A time where some prices have not yet adjusted Sticky prices a concept that some prices cannot change quickly in response shocks In this model input prices are assumed to be stickier than output prices This gives us two AS curves one for the long run and one for the short run The Short Run Aggregate Supply SRAS curve has a positive slope like other supply curves This is the curve for when input prices are assumed fixed but output prices flexible The Long Run Aggregate Supply LRAS curve is the output that the economy can produce when all prices are flexible Elias Yannopoulos Aggregate Supply Aggregate Supply Shifts in Aggregate Supply LRAS shifts when there is a change in long run potential output What causes long run potential output to change Hint we spent an entire week of class talking about it Resources Technology Institutions Shifting LRAS also Shifts SRAS What causes shifts in SRAS only then Some supply shocks do not affect long run productivity Temporary supply shocks Ex weather Expected future price levels Import prices Elias Yannopoulos Aggregate Supply Aggregate Supply Equilibrium Long Run Equilibrium vs Short Run Equilibrium Long Run Equilibrium has 3 important features LRAS AD SRAS Y Y u u Short



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