AS-AD_f12

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Unformatted text preview: ppens to the US AD if: What happens to the US AD if: China’s economy slows down? A tax cut increases disposable income? The gloomy economic outlook dampens investment? The US must build infrastructure to host the 2020 Olympics Interest rate cuts encourage investment? Prices rise as food becomes more expensive? Workers become more productive? Aggregate Supply Aggregate Supply AS is the key to macroeconomic policy – If steep: AD shifts have little impact on GDP – If flat: AD shifts have large impact on GDP In the long run AS is vertical – Set by the aggregate production function Y = f(K, L) – Real GDP depends on capital and labor Neither is affected by price Sets full employment (potential) GDP Long Run Aggregate Supply Long Run Aggregate Supply In the long run – y=f(K,L) – Everyone adjusts completely – No role for price – LRAS is vertical P LRAS AD y0 y Long Run Aggregate Supply Long Run Aggregate Supply In the long run – y=f(K,L) – Everyone adjusts completely – No role for price – LRAS is vertical If AD shifts – Prices rise – Real GDP is fixed P LRAS AD’ AD y0 y LRAS an...
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This note was uploaded on 02/25/2014 for the course BUSINESS 2101 taught by Professor Gerst during the Spring '12 term at Temple.

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