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Coursepack Notes for Exam #3 - Chapter 11-Coursepack Notes...

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Chapter 11-Coursepack Notes Short-Run Aggregate Supply Curve- pL=oY^s+S, (y=mx+b) Slopes Upward- Diminishing Returns (Wage is the same and causes marginal cost of an additional unit of output to rise), and Deteriorating Quality of Inputs (Price level rises as real GDP increases along SRAS) Shifts- INEPTT 1. Input Prices- increase causes a shift vertically up and left= higher cost of production for any given quantity of real GDP(decrease in supply) 2. Number of Producers- Increase in capacity to produce causes a shift to the right. 3. Expectations about Future Prices- Expectations of higher inflation will result in higher nominal wages and will cause an upward shift. 4. Pile of Capital Goods- Increase in number of capital goods available increases economy’s capacity to produce, causing shift to the right and down (increase in supply). 5. Technology- improvement in technology allows producing more, shifting to the right and down (increase in supply). 6. Certain Kinds of Taxes (payroll taxes, taxes on capital goods, taxes on energy) - increase in these kinds will shift upward and to the left. *changes in income taxes and transfer payments affect Aggregate Demand not Supply. General- Aggregate supply reflects billions of production decisions made by resource suppliers and firms. A nominal wage is measured in current dollars rather than constant dollars. Expected Price level is significant b/c firms and resource owners make long-term agreements based on the expected price level. Real Wage represents the quantity of goods and services a worker can purchase in exchange for work time. If price level rises by 4% and nominal wage rises by 6%, the real wage rises by 2%. Short Run a period of time during which resource buyers and sellers can’t adjust fully to changes in the price level The actual price level is not assumed to be constant along the SRAS.
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The steepness of the SRAS curve depends on how quickly production costs increase as output expands. Increases in the costs of producing each level of output will not cause a rightward shift of the SRAS. Long-Run Aggregate Supply curve- vertical line at the economy’s potential output. Shifts- 1. Changes in Supply of Resources(Land, Labor, and Capital) 2. Change in productivity of those resources( through technological change, education, training, or the improvement in the institutional environment) General- If an economy is producing the full-employment level of output, position the point on the boundary of the PPF.
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