Short-Run Aggregate Supply
· This is the period in which wages (and other input prices) remain fixed as price level increase or decrease
Long-Run Aggregate Supply
· Period of time in which wages have become fully responsive to changes in price level
Effects over Short-Run / Long-Run
· In the short-run, price level changes allow for companies to exceed normal out puts and hire more workers because profits are increasing while wages remain constant
· In the long run, wages will adjust to the price level and previous output level will adjust accordingly.
Equilibrium in the Extended Model
· The extended model means that both the short run and long run AS curves.
· The long AS curves is represented with a vertical line at full employment level of real GDP.
Demand Pull Inflation in the AS Model
· Demand pulls (to the right) which causes prices to increase based on increase in aggregate demand.
· In the short run, demand pull will drive up prices, and increase production
· In the long run, increase in aggregate demand will eventually return to previous levels.
Cost-Push and the Extended Model
· Cost-push (to the left) arises from factors that will increase per unit costs such as increase in the price of a key resource.
Dilemma for the Government
· In an effort to fight cost-push, the government can react in 2 different ways……
1. Action such as spending by the government could begin an inflationary spiral
2. No action however could lead to recession by keeping production and employment levels declining.
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