ECON 2105 1nd Edition Lecture 13 Outline of Last Lecture I. Outline of Actual Investment Spending II. Aggregate Demand and Price Level III. Wealth Effect IV. Interest Rate Effect V. Exchange Rate Effect (Trade Effect) VI. Shifts on the AD curve Current Lecture I. Aggregate Supply of NationII. Shifts on Short-Run Aggregate Supply CurveIII. Long Run Aggregate Supply Curve Current LectureModule 18 Aggregate Supply: Intro and Determinants I. Aggregate Supply of Nation- Aggregate supply of what? Supply of total final goods and services (real GDP) - Aggregate supply by whom? Mostly from domestic firms, sometimes the government. - More resources (land, capital, labor)  more supply we will have in the nation (positive) - More input prices (wages, rents)  less supply (negative)- We look for aggregate prices and aggregate supply - SRAS- short run aggregate supply These 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.- Aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output in the economy. (upward sloping)- If prices go up, revenues will rise, profits will go up. So it is logical to supply more. Input prices will go up, cost will go up. In the shortrun we expect those input prices to not be that big! It an advantage for the company producing, the have the luxury not to raise wages because it is short run. - Why does the SRAS curve slope upward?o Because nominal wages are sticky, ridged, fixed in the short run o Ridged wages: nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages.- How do sticky wages affect SRAS?o Profit per unit (goes up)= price per unit(goes up) − production cost per unit. (because of rigid wages and rent)o A higher aggregate price level leads to higher profits and higher aggregate output in the short run.II. Shifts on Short-Run Aggregate Supply Curve- What happens when something changes production levels at every price level?- The SRAS curve shifts because of changes in:o commodity prices go up, negative supply shock. (iron, steel, oil shock (tension in the middle east shift to the left, copper) o nominal wages goes up. (increase in minimum wage negative supply shock) o Productivity goes up. (technology increases) Positive supply shock  to the righto Tax goes up. Negative supply shock  shift to the left o Regulations go up  negative supply shock o Business expectations goes up (investor confidence)  positive supply shock, shift to the right o Inflation expectations increases  negative supply shock, shift to the left - Each of these factors changes producers’ profits and therefore shifts the SRAS.- What happens to SRAS curve wheno when input costs rise.  profits go down so negative supply shock, shift to the left o when taxes rise.  negative supply shock o when interest rates rise.  negative supply shock, shift lefto when productivity rises.  positive supply shock, shift to the right III. Long Run Aggregate Supply Curve - The long-run aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible.- Profit = price –cost - The long run is the time it takes for all prices (including nominal wages) to adjust.- Now there is no change to profits SIMPLY BECAUSE PRICES HAVE CHANGED.- Goods prices and factor prices move together - Potential output is the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible.o …leaves the quantity of aggregate output supplied unchanged in the long run.- Long run level of output- full employment level, level of output - Fall in aggregate price level- decrease in wages, rents, interest- What determines this level? o Real factors- physical capital, skilled/unskilled labor, not prices- Long run – going up by 3% - The level of real GDP is almost always either above or below potential output because of short-run fluctuations.- If the economy finds itself at P1 on SRAS1, aggregate output supplied exceeds potential output (temporarily). Eventually, low unemployment will cause nominal wages to rise, and SRAS will shift left.- If the economy finds itself at P1 on SRAS1, aggregate output supplied falls short of potential output (temporarily). Eventually, high unemployment will cause nominal wages to fall, and SRAS will shift