If it is further assumed that the economy is fully employing all of its resources

If it is further assumed that the economy is fully employing all of its resources

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
If it is further assumed that the economy is fully employing all of its resources, the equilibrium level of  real GDP,  Y * , will correspond to the  natural level of real GDP , and the  LAS  curve may be drawn as  a vertical line at  Y * , as in Figure 1  .  Consider what happens to this situation when the aggregate demand curve shifts to the  right  from  AD 1  to  AD 2 , as in Figure 2  .  Figure 2 A change in the aggregate demand when the economy is at the natural level of real GDP The immediate, short-run effect is that the equilibrium price level increases from  P 1 , to  P 2 , and real  GDP increases  above  its natural level, from  Y 1 , to  Y 2   . The increase in real GDP is due to the fact 
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: that input prices have not yet risen in response to the increase in the price level for final goods; the economy is still operating along the old SAS curve, SAS 1 . Eventually, however, input providers will demand higher prices to reflect the increase in the general price level. Production costs will therefore increase, and the supply of real GDP will be reduced. This is represented by the shift to the left of the SAS curve from SAS 1 to SAS 2 . The end result is a higher price level, P 3 , at the same, natural level of real GDP, Y 1 ....
View Full Document

Page1 / 2

If it is further assumed that the economy is fully employing all of its resources

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online