2. SHORT-RUN AND LONG-RUN AGGREGATE SUPPLY Period in which nominal wages (and other input prices) remain fixed as the price level increases or decreases Short Run - Period in which nominal wages are fully responsive to previous changes in the price level Long Run -
3. o AS 1 P 1 P 2 Q f Q 2 a 1 a 2 A higher price level increases profits and output moving the economy from a 1 to a 2 . Price Level Real domestic output SHORT-RUN AGGREGATE SUPPLY
4. o AS 1 P 1 P 2 Q f a 1 a 2 A lower price level decreases profits and output moving the economy from a 1 to a 3 . Price Level Real domestic output SHORT-RUN AGGREGATE SUPPLY P 3 a 3 Q 2 Q 3
5. o AS 1 P 1 P 2 Q f a 2 a 1 AS 2 b 1 AS LR Price Level Real domestic output LONG-RUN AGGREGATE SUPPLY A higher price level results in higher nominal wages and thus shifts the short-run aggregate supply to the left .
6. o P 3 AS 1 P 1 P 2 Q f a 2 a 3 a 1 AS 2 b 1 AS 3 c 1 AS LR Price Level Real domestic output LONG-RUN AGGREGATE SUPPLY A lower price level results reduces nominal wages and shifts the short-run aggregate supply to the right .
7. EQUILIBRIUM IN THE EXTENDED AD-AS MODEL o P 1 AS 1 AS LR AD 1 a Q f Price Level Real domestic output
8. DEMAND-PULL INFLATION o P 1 AS 1 AS LR AD 1 a Q f Price Level Real domestic output b P 2 P 3 AD 2 AS 2 c Q 1
9. Q 2 COST-PUSH INFLATION o P 1 AS 1 AS LR AD 1 a Q f Price Level Real domestic output b P 2 AS 2 Occurs when short-run AS shifts left
10. Q 2 COST-PUSH INFLATION o P 1 AS 1 AS LR AD 1 a Q f Price Level Real domestic output b P 2 P 3 AD 2 AS 2 Government response with increased AD c Even higher price levels
11. COST-PUSH INFLATION o P 1 AS 1 AS LR AD 1 a Q f Price Level Real domestic output b P 2 AS 2 If government allows a recession to occur Q 2
12. Q 2 COST-PUSH INFLATION o P 1 AS 1 AS LR AD 1 a Q f Price Level Real domestic output b P 2 AS 2 If government allows a recession to occur Nominal wages fall & AS returns to its original location
13.
14. o P 0 Q 0 AD 0 AS EFFECT OF CHANGES IN AGGREGATE DEMAND ON REAL OUTPUT AND THE PRICE LEVEL Price Level Real domestic output
15. o P 0 P 1 Q 0 Q 1 AD 0 AD 1 AS EFFECT OF CHANGES IN AGGREGATE DEMAND ON REAL OUTPUT AND THE PRICE LEVEL Price Level Real domestic output
16. o P 0 P 1 P 2 Q 0 Q 1 Q 2 AD 0 AD 1 AD 2 AS EFFECT OF CHANGES IN AGGREGATE DEMAND ON REAL OUTPUT AND THE PRICE LEVEL Price Level Real domestic output
17. o P 0 P 1 P 2 P 3 Q 0 Q 1 Q 2 Q 3 AD 0 AD 1 AD 2 AD 3 AS EFFECT OF CHANGES IN AGGREGATE DEMAND ON REAL OUTPUT AND THE PRICE LEVEL Price Level Real domestic output
19. 1997 15 10 5 0 1992 2002 GLOBAL PERSPECTIVE The Misery Index, Selected Nations 1992 - 2002 Source: Bureau of Labor Statistics U.K. Canada Italy France U.S. Germany Japan