1 Reading Assignment: Aggregate Supply: Chapter 24.1 (p.620-625) Aggregate Demand: Chapter 24.2 (p.626-631) Macroecon. Equilibrium & full-employment equilibrium: Chapter 24.3 (p.632-633) After studying this topic, you will be able to: 1 Define and explain the influences on aggregate supply. 2 Define and explain the influences on aggregate demand. 3 Define the macroeconomic equilibrium and full-employment equilibrium.
2 24.1 Aggregate Supply The quantity of real GDP supplied is the total amount of final goods and services that firms in a country plan to produce. The quantity of real GDP supplied depends on the quantities of Labor employed Capital, human capital, and the state of technology Land and natural resources Entrepreneurial talent At full employment: The real wage rate makes the quantity of labor demanded equal to the quantity of labor supplied. Real GDP equals potential GDP. Over the business cycle: The quantity of labor employed fluctuates around its full employment level. Real GDP fluctuates around potential GDP.
3 24.1 Aggregate Supply Aggregate Supply Basics Aggregate supply is the relationship between the quantity of real GDP supplied and the price level when all other influences on production plans remain the same. Other things remaining the same, When the price level rises, the quantity of real GDP supplied increases. When the price level falls, the quantity of real GDP supplied decreases . Along the aggregate supply curve, the only influence on production plans that changes is the price level. All the other influences on production plans remain constant. Among these other influences are The money wage rate The money prices of other resources In contrast, along the potential GDP line, when the price level changes the money wage rate changes to keep the real wage rate at the full- employment level.
4 24.1 Aggregate Supply Figure 24.1 shows the aggregate supply schedule and aggregate supply curve. Each point A to E on the AS curve corresponds to a row of the schedule.
5 24.1 Aggregate Supply 1. Potential GDP is $13 trillion and when the price level is 110, real GDP equals potential GDP. 2. If the price level is above 110, real GDP exceeds potential GDP. 3. If the price level is below 110, real GDP is less than potential GDP.
6 Why the AS Curve Slopes Upward When the price level rises and the money wage rate is constant, the real wage rate falls and employment increases. The quantity of real GDP supplied increases. When the price level falls and the money wage rate is constant, the real wage rate rises and employment decreases. The quantity of real GDP supplied decreases. 24.1 Aggregate Supply Changes in Aggregate Supply Aggregate supply changes when any influence on production plans other than the price level changes.