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econ3 11-1 - factor price considered is the nominal wage...

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LRAS 2-29-08 Chapter 11 (Aggregate supply and Aggregate Demand) - Aggregates supply o Relationship between quantity of real GDP supplied and the price level - Long-run o Long enough for Real wage rate to adjust The economy to achieve full employment Real GDP = potential GDP Unemployment = natural rate of unemployment - Long-run aggregate supply o Aggregate supply relationship In the long-run when real GDP = potential GDP LRAS = long-run aggregate supply - Potential GDP changes when: o The full-employment labor quantity changes - Short run period during which some money prices are sticky o Real GDP might be below, above, or at potential GDP
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- Short-run aggregate supply o the aggregate supply relationship in the short-run when nominal prices of factors of production and potential GDP remain constant the most important
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Unformatted text preview: factor price considered is the nominal wage rate-a single firm o SRAS changes when Nominal wage rate changes • SRAS shifts • LRAS does not shift Potential GDP changes • Both SRAS and LRAS adjust-Aggregate Demand o Relationship between the quantity of real GDP demanded and the price level-Why demand is downward sloping? o Wealth effect affects overall desire to consume rather than our ability to spend When price level rises, real wealth decreases o Substitution effect When the price level rises, nominal interest rates rise-M/P = real money o A fall in real money stock leads to a rise in nominal interest rates o Money market Y = C + I + G + NX-Substitution effect o When price level rises, the real exchange rate rises...
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