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Defining sras and lras

In the Clear It Up feature titled “Why does AS cross potential GDP?” we differentiated between short run changes in aggregate supply which are shown by the AS curve and long run changes in aggregate supply which are defined by the vertical line at potential GDP. In the short run, if demand is too low (or too high), it is possible for producers to supply less GDP (or more GDP) than potential. In the long run, however, producers are limited to producing at potential GDP. For this reason, what we have been calling the AS curve, will from this point on may also be referred to as the short run aggregate supply (SRAS) curve    . The vertical line at potential GDP may also be referred to as the long run aggregate supply (LRAS) curve    .

Key concepts and summary

The upward-sloping short run aggregate supply (SRAS) curve shows the positive relationship between the price level and the level of real GDP in the short run. Aggregate supply slopes up because when the price level for outputs increases, while the price level of inputs remains fixed, the opportunity for additional profits encourages more production. The aggregate supply curve is near-horizontal on the left and near-vertical on the right. In the long run, aggregate supply is shown by a vertical line at the level of potential output, which is the maximum level of output the economy can produce with its existing levels of workers, physical capital, technology, and economic institutions.

The downward-sloping aggregate demand (AD) curve shows the relationship between the price level for outputs and the quantity of total spending in the economy. It slopes down because of: (a) the wealth effect, which means that a higher price level leads to lower real wealth, which reduces the level of consumption; (b) the interest rate effect, which holds that a higher price level will mean a greater demand for money, which will tend to drive up interest rates and reduce investment spending; and (c) the foreign price effect, which holds that a rise in the price level will make domestic goods relatively more expensive, discouraging exports and encouraging imports.

Problems

Review the problem shown in the Work It Out titled "Interpreting the AD/AS Model." Like the information provided in that feature, [link] shows information on aggregate supply, aggregate demand, and the price level for the imaginary country of Xurbia.

Price level: ad/as
Price Level AD AS
110 700 600
120 690 640
130 680 680
140 670 720
150 660 740
160 650 760
170 640 770
  1. Plot the AD/AS diagram from the data shown. Identify the equilibrium.
  2. Imagine that, as a result of a government tax cut, aggregate demand becomes higher by 50 at every price level. Identify the new equilibrium.
  3. How will the new equilibrium alter output? How will it alter the price level? What do you think will happen to employment?
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The imaginary country of Harris Island has the aggregate supply and aggregate demand curves as shown in [link] .

Price level: ad/as
Price Level AD AS
100 700 200
120 600 325
140 500 500
160 400 570
180 300 620
  1. Plot the AD/AS diagram. Identify the equilibrium.
  2. Would you expect unemployment in this economy to be relatively high or low?
  3. Would you expect concern about inflation in this economy to be relatively high or low?
  4. Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275 at every price level. Identify the new aggregate equilibrium.
  5. How will the shift in AD affect the original output, price level, and employment?
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Santher is an economy described by [link] .

Price level: ad/as
Price Level AD AS
50 1,000 250
60 950 580
70 900 750
80 850 850
90 800 900
  1. Plot the AD/AS curves and identify the equilibrium.
  2. Would you expect unemployment in this economy to be relatively high or low?
  3. Would you expect prices to be a relatively large or small concern for this economy?
  4. Imagine that input prices fall and so AS shifts to the right by 150 units. Identify the new equilibrium.
  5. How will the shift in AS affect the original output, price level, and employment?
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Questions & Answers

which model predicted a global collapse in the world's social and economic system before the year 2010
Francis Reply
what is the formula of mixed income ?
Sanjum Reply
labor force in.Nigeria is seen as .......?
Aisha Reply
Is demand the same as being in need of a product?
Aphiwe Reply
yeah
Demand is defer from only need of products
Zubairu
need is the primary and main root of demand. but demand is the result of combination of need; income capacity and desire to expend of money for that product.
Ramu
products or services
jax
what is price determination?
Alick Reply
why are imports subtructed when GDP is calculated in the expenditure approach
nati
what is fiscalpolicy
nati Reply
The way of the government expenses and other analysis
Zubairu
It explains government spending and how it helps to direct the economy towards the desired direction. For instance, if the govt of a nation is desirous of achieving economic growth and development, then the govt will adopt an expansionary fiscal policy which imply more spending by the govt.
Sunday
and politics party important
mujtaba Reply
politics party important
mujtaba
Which party is that
Zubairu
persons who stopped searching for jobs but would accept if the opportunity presents itself
Torissa Reply
persons who are unemployed whether they are underage, retired or incapacitated
Torissa
the us economy is best characterized as?
Shekeriah
what is the impact of fiscal policy in the short and long run in the AD/AS model...
Hydrammeh Reply
What is demand
Mohd Reply
Demand is the desire for a commodity backed by the willingness and the purchasing power too.
Ajay
what is the impact of the higher tax rate on the business and the economy at large..?
Hydrammeh Reply
aggregate demand decreases and GDP decreases in the long run prices will decrease because aggregate supply will shift to the right and increase
Murabit
Thanks, Murabit
Hydrammeh
But still I will need more explanation
Hydrammeh
no problem tax rate is a form of fiscal policy so any time the government changes spending or taxes it will directly affect the economy
Murabit
but remember that there at different economic views on fiscal policy there is classical,Keynesian and moneterism
Murabit
if taxes increase aggregate demand decreases causing a fall in prices causing a fall in the money demand lowering interest rate and increasing investment spending in turn increasing prices
Murabit
thanks so much Murabit
Hydrammeh
what are the policy recommendations for impact of government borrowing?
Baisiro Reply
how can I get Utility notes here
Tabea Reply
I also want to know
konglan
I have them
Alick
money and money supply
Yogesh Reply
money is anything that is generally accepted as payment of goods and services or that is accepted in settlement of debt.
Rakgadi
Money supply?
Rakgadi
Money supply is the total value of monetary assets available in an economy at a specific time.
Rakgadi
supply of money:- The total quantity of money in an economy at a point of time......
Ittoo
What is the difference between monetary economy and barter economy?
Rakgadi
monetary economy is simply an economy where money acts as a medium of exchange and barter economy is why where goods acts as a medium of exchange
Ittoo
Thank you Ittoo.
Rakgadi
please cut why.....in last ans
Ittoo
and no need of thanks dear
Ittoo
Don't damend work in inflation
Mishael Reply

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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