The long run aggregate supply lras curve reflects the

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The long-run aggregate supply (LRAS) curve reflects the fact that the money supply and the price level—nominal variables—have no impact on the quantity of goods and services—a real variable—that theeconomy produces in the long run. The long-run aggregate supply curve is therefore a vertical line atthe economy's natural level of output ($50 billion). In the long run, the economy's natural level ofoutput is determined by the size of its labor force, its stocks of human and physical capital, its naturalresources, and its technological knowledge.In the short run, the quantity of output supplied by firms fluctuates around the natural level of outputwhen the actual price level turns out to be different from what people expected. For example, anunexpectedly low price level of 90 causes firms to supply a quantity of output less than the naturallevel of output in the short run. The short-run aggregate supply curve is therefore upward sloping:Quantity of Output SuppliedQuantity of Output Supplied==Natural Level of Output+α×(Price LevelActual−Price LevelExpected)Natural Level of Output+α×Price LevelActual−Price LevelExpected==$50 billion+$2 billion×(90−100)$50 billion+$2 billion×90−100==$50 billion+(−$20) billion$50 billion+−$20 billion==$30 billion$30 billionIf the actual price level turns out to be equal to what people expected, output will be equal to thenatural level of output:Quantity of Output SuppliedQuantity of Output Supplied==$50 billion+$2 billion×(100−100)$50 billion+$2billion×100−100==$50 billion$50 billionAn unexpectedly high price level of 110 causes firms to supply a quantity of output that exceeds thenatural level of output in the short run:
Quantity of Output SuppliedQuantity of Output Supplied==$50 billion+$2 billion×(110−100)$50 billion+$2billion×110−100==$50 billion+$20 billion$50 billion+$20 billion==$70 billion$70 billionUsing the same formula for the remaining price levels produces a short-run aggregate supply curvethat goes through the coordinates (30, 90); (40, 95); (50, 100); (60, 105); and (70, 110).. Determinants of short-run aggregate supplyThe following graph shows a decrease in short-run aggregate supply (AS) in a hypotheticaleconomy where the currency is the dollar. Specifically, the short-run aggregate supply curveshifts to the left fromAS1toAS2 , causing the quantity of output supplied at a price level of100 to fall from $200 billion to $150 billion.050100150200250300350400
2001751501251007550250PRICE LEVELQUANTITY OF OUTPUTAS1AS2

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Term
Spring
Professor
Dr.Agnes Meroka

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