Unit 5; Day 1

Aggregate Supply 

• Shor Run Aggregate Supply
• In Macroeconomics, this is the period in which wages and other input prices remain fixed as price levels increase or decrease
• Long Run Aggregate supply
• Period of time in which wages have become fully responsive to changes in price level
• Effects over Short-Run
• In the short run, price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant
• In long run, wages will adjust to price level and previous output levels will adjust accordingly
• Equilibrium in Extended Model
• The long as curve is represented with vertical line @ full employment level of real GDP
• Demand Pull inflation in the AS model
• Demand- Pull: PRices increase based on increase in AD
• In short run, demand pull will drive up prices, increase production
• In long run, increase in AD will eventually return to previous levels
• Cost Push and Extended model
• Cost push arises from factors that will increase per unit costs such as increase in price of key resource 
• Short run shifts left, in this case it is the cause of price level increase, not effect
• Dilemma for the Govt
• In effort to fight cost push, the gov can react in 2 diff ways
• Action such as spending by gov could begin inflationary spiral
• No action could lead to recession by keeping production and employment levels declining