Econ 104 Final Exam Study GuideI. Long Run & Short Run Aggregate Supply Curvesa. Long Runi. Identifies output at potential (full employment)ii. Shifters1. Change in resource bases (change in labor force, baby boom, change in population)2. Change in size of capital stock3. Technical change/innovationiii. Left Shift Example – Hurricane Sandy1. Tremendous damage along East Coast2. Loss of capital businesses, transportation systemsb. SRASi. Upward slopingii. As the price level increases, the quantity of goods and services firms are willing to supply increasesiii. Example – Coffee Shop Owner1. One of many firms producing outputc. Why is SRAS upward sloping?i. Input prices (e.g. wages) are sticky (e.g. you own a coffee shop)ii. Suppose AD increases in the US economy1. Output prices are flexible which increase prices of lattes, mochas, etc.2. Input costs are slow to adjusta. Profits and revenues increasei. Profits = revenues - costsb. You have an incentive to increase output3. When price level increases in short run from GDP deflator 100 to 110, firms produce more output becauseinput prices are stickyiii. Menu Costs1. As demand and price level increase, some firms may notincrease their prices due to menu costsa. Menu costs: the costs to forms of changing prices2. These firms respond to the increase in demand (relatively lower price) by increasing quantity supplied3. Conclusion: A rising price level leads to a larger quantityof goods and services suppliedd. Shifts in SRASi. An unexpected change in the price of an important natural resource1. Example: An increase in the price of oil (supply shock)2. Increase of oil price implies SRAS shifts leftward3. Immediate reaction to shock is to cut production4. Output decreases, unemployment increases, and price level eventually adjusts (slow)5. Prior to Great Recession 2003-2008a. Surging demand for oil by developing economies  mainly China and Indiab. Oil suppliers were weak/stagnant ii. Increase in the labor force/the capital stock1. Right shift  more output produced at every price leveliii. Technological change 1. Increase in productivity2. Right shift  costs of producing output decreaseiv. An increase in the expected future price level1. Left shift  workers/firms increase wages and pricesv. Workers and firms adjustment to errors in past expectations about the price level1. Left shift  workers/firms increase wages and pricesvi. The expected price of an important natural resource increases1. Left shift  costs of producing output risee. Impact of Oil Price Shocki. Negative price shockii. Negative because it can throw us into recessioniii. Long run equilibrium is restored due to flexible wages and pricesf. Impact of Positive Supply Shock – Interneti. LRAS shifts rightwardii. Firms able to produce more outputiii. SRAS shifts rightward because of an increase in productivity which lowers costiv. Price levels fall, output rises, but full employment unchangedg. Negative Demand Shock – Decrease in Investment Expendituresi. Rightward shift in SRASii. Leftward shift in ADiii. Workers willing to accept lower wagesiv. Firms accept lower prices for outputh. Great Recessioni. Small increase in price levelii. Dramatic decrease in outputiii. Leftward shift in SRASiv. Leftward shift in AD  decrease C and Ii. New Economyi. Economic growth resulting from technological advances that make businesses and workers more productiveii. Example - Technological innovation of 1990s1. Increase productivity and increase capital stock2. Strong ADa. Increase wealthb. Increase consumer confidencec. Increase investmentd. Small increase in price leveliii. Conclusions1. Without policy intervention (stabilization policy) the automatic adjustment mechanism “kicks in”a. Assuming P + W are