ECON 2203 1st Edition Lecture 27 Outline•Three Facts about short-run economics•Aggregate Supply and Aggregate Demand model– The Long-run Aggregate Supply Curve (LRAS) (slides#14) – The Short-run Aggregate Supply Curve (SRAS) (slide#20)• The sticky-wage theory (slide#22)• The sticky-price theory (slide#30)• The misperceptions theory (slide#34)– Aggregate Demand Curve (AD) (slide#42)•Two Causes of Economic Fluctuations (slide#53)– The Effects of a shift in Aggregate Demand– The Effects of a shift in Aggregate Supply• The concept of Stagflation31. The Sticky-Wage TheorySRAS curve slopes upward because nominal wages are slow to adjust to changing economic conditions in the short run. – Wages are “sticky” in the short run.– The slow adjustment is normally due to labor contractsFirms and workers set the nominal wage in advance based on PE, the price level they expect to prevail. Sticky-wage theory, the economy is in a recession because the price level has declined so that real wages are too h igh, thus labor demand is too low. •Over time, as nominal wages are adjusted so that real wages decline, the economy returns to full employmentThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.222. The Sticky-Price TheorySRAS curve slopes upward because many prices are slow to adjust to changing economic condition in the short run.– Prices are “sticky” in the short run.– The slow adjustment is normally due to menu costs, the costs of adjusting prices. – Examples: cost of printing new menus, the time required to changeprice tags Firms set sticky prices in advance based on PE. Some firms may response to the change of prices fast but other firms may lag behind. Sticky-price theory, the economy is in a recession because not all prices adjust quickly.-Over time, firms are able to adjust their prices more fully, and the economy returns to the long-run aggregate-supply curve303. The Misperceptions TheorySRAS curve slopes upward firms may confuse changes inP with changes in the relative price of the products theysell.For example,– Wheat farmers may notice a fall in the price of wheat before they notice a fall in the prices of the many items they buy as
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