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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

WHY DEVELOP COUNTRIES RELY ON DEVELOPED COUNTRIES?
Ben Reply
what is the determination of aggregate demand?
Maddy Reply
classical dichotomy and its components?
Romaisa Reply
what will happen to the demand curve when there is an inflation in an economy
Hamza Reply
From my view, I think the demand curve will shift inwards.
Bobo
now it depends on what kind of inflation it is, depending on the type of inflation the movement of the demand curve can be stated.
Munimu
yes it depends on the cause for inflation. if it caused by maybe an increase in money supply, the effect is neutral in the long term, therefore there are no effects on total output in the economy, except for an increase in price
Lucas
but short term in general i think you could expect the demand curve to shift inwards as consumers experience a decrease in real income
Lucas
source of capital for the sole trader
Dogbey Reply
borrowing from relatives, government grants, bank loans, personal savings, credit card etc.
Munimu
Suppose you are holding 2000 in a checking account and the price level decrease by 20 %how much it will affect your purchasing power and why
Iqra Reply
Hi Iqra, will answer your question soon.
Aleem
2000*0.2= 400 2000-400= 1600
Munimu
1600
Munimu
a price level decrease is deflation. it means you'll be able to afford to buy more with your 2000 and your real income becomes 2000÷(100-20)=2500
Lucas
the amount will decrease to 1600 and you can't be able to buy over this amount
Agogo
As an economist student discuss how the pandemic covid19 can affect the aggregate demand and aggregate supply thereby leading to decrease in GDP and standard of living of citizens of nigeria
Fadila Reply
hi how can you help me?
qusai Reply
can you send me the notes
Mohd
hello is what are you talking about?
Mousa
unemployment and low inflation    .
Abdirizaq Reply
Structure/Organization Of The Federal Reserve
Abdirizaq
sorry guys in macroeconomics what is different between inflation and intrest rate? please example for pandemic related maybe?
Siyanda
hello
Ramu
Is this Aap for class 11 and 12 only not for graduation?
ankit Reply
yeah like for du MA entrance
VAISHALI
okay
ankit
Aree i m also asking
VAISHALI
for du MA entrance. u shouldn't rely on app. Go for SAURABH SIR notes. available on flipkart.
Saurabh
ohh thanks
VAISHALI
pleasure
Saurabh
ooh
ankit
what is inflation
Bright Reply
hike in price
shola
situation of rise in price with the fall in purchasing power of money
Almina
cycle of corruption
Omkar
rise in price of a Nation economy in terms of trade
adebiyi
what is distruptive international trade?
NOEL
meaning of inflation
Jayakumar Reply
increase in general prices level in an economy.
Tayyab
increase in general price level
Abu
The fall in standard of living because goods and services become expensive.
NOEL
what is value added and how is it used in calculating GDP
Benedicta Reply
value added is final price of output minus cost of production. For example, let's say you make a shirt with raw materials that cost $20, and then sell the shirt for $35 added value would be 35-20=15. In calculating GDP, it is used to avoid double counting goods. Exp. eggs individually and in bread.
julian
as the price of tickets rises from $200 to $250, what is the price elasticity of demand for business travelers, vacationers using midpoint method
Buumba Reply
$300
Jb
@jb how do uget $300
Jeff
It means you are measuring the cost against availability.
Muyiwa
Explain how income taxes and transfer payments are used to stabilize the economy
Nakagwa Reply
reduce demand on scarce resources by reducing money supply.
NOEL

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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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