ch22 - Aggregate Supply and Aggregate Demand Aggregate...

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Chapter 22 Aggregate Supply and Aggregate Demand Aggregate Supply The quantity of real GDP supplied ( Y ) depends on: o The quantity of labour ( L ) o The quantity of capital ( K ) o The state of technology ( T ) The influence of these three factors on the quantity of real GDP supplied is described by the aggregate production function . Aggregate supply is the relationship between the quantity of real GDP supplied and the price level. We distinguish two time frames for aggregate supply: o Long-run aggregate supply o Short-run aggregate supply The macroeconomic long run is a time frame that is sufficiently long enough for real GDP to return to potential GDP so that full employment prevails. Potential GDP is the quantity of GDP at full employment. The long-run aggregate supply curve is the relationship between the quantity of real GDP supplied and the price level in the long run when real GDP equals potential GDP. The figure shows the long-run aggregate supply curve LAS , which is vertical at potential GDP. A movement along the curve, means that two sets of prices are changing: o The price level o The money wage rate and other resource prices Because both the price level and factor prices change, the real factor prices remain constant. For example, the real wage is constant. The real wage rate remains at the level that achieves full employment of labour. The macroeconomic short run is a period during which real GDP has fallen below or risen above potential GDP.
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The short-run aggregate supply curve is the relationship between the quantity of real GDP supplied and the price level in the short run when the money wage rate, the prices of other resources, and potential GDP remain constant. The figure shows a short-run aggregate supply curve. The short-run aggregate supply curve ( SAS ) is upward sloping. At a price level of 100, the quantity of real GDP supplied is $900 billion. At a price level of 110, the quantity of real GDP supplied is $1,000 billion, which equals potential GDP. At a price level of 120, the quantity of real GDP supplied is $1,100 billion, which exceeds potential GDP. The curve slopes upward because, when the price level rises with a constant money wage rate, the real wage falls. With a lower real wage, firms make a larger profit by producing a larger output.
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ch22 - Aggregate Supply and Aggregate Demand Aggregate...

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