LONG RUN AGGREGATE SUPPLY

1
LONG RUN AGGREGATE SUPPLY

• the amount of real output
• the economy is able to supply
• at different price levels
• if the economy is at Natural Real GDP

2
NATURAL REAL GDP

• the amount of output
• the economy could produce
• if it operated at full employment
• called Qn or Qf

3
LONG RUN AGGREAGATE SUPPLYLRAS

• vertical line
• at full employment Real GDP
• Qn Qf

4
THREE POSSIBLE STATES OF THE ECONOMY

• Full employment equilibrium
• Recessionary gap
• Inflationary gap

5
FULL EMPLOYMENT EQUILIBRIUM

• The intersection of SRAS and AD is equal to the
  Natural Real GDP

6
FULL EMPLOYMENT OUTPUT(other terms)

• Potential GDP
• the Natural Rate of Employment
• the Natural Rate of Unemployment
• QF or QN

7
FULL EMPLOYMENT EQUILIBRIUM
LRAS
PRICE LEVEL
SRAS
AD
Qn
REAL GDP
8
RECESSIONARY GAP

• Short run equilibrium output is less than full
  employment
• People are not spending enough to purchase all
  that has been produced (inventories increase)
• unemployment is a concern

9
RECESSIONARY GAP
LRAS
PRICE LEVEL
SRAS
AD
Qn
Q1
REAL GDP
10
POLICY IMPLICATIONS OF A SELF REGULATING ECONOMY

• Recessionary gaps are eliminated by decreases in
  wages and other input prices
• Graphically this is an increase in SRAS

11
Self-Regulating Economy Exhibit 2 (1 of 2)
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Self-Regulating Economy Exhibit 2 (2 of 2)
13
INFLATIONARY GAP

• Equilibrium output is greater than full
  employment output
• People are spending more than businesses
  anticipated and inventories are being drawn down
• Inflation is a major concern

14
INFLATIONARY GAP
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POLICY IMPLICATIONS OF A SELF REGULATING ECONOMY

• Inflationary gaps are eliminated by increases in
  wages and input prices
• Graphically, this is a decrease in SRAS

16
Self-Regulating Economy Removing an
Inflationary Gap Exhibit 3 (1 of 2)
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17
Self-Regulating Economy Removing an
Inflationary Gap Exhibit 3 (2 of 2)
18
CLASSICAL ECONOMIC REASONING

• Inflationary and Recessionary gaps will be
  automatically eliminated due to
• flexible prices
• flexible wages
• flexible interest rates

19
CLASSICAL VIEW OF THE PRODUCT MARKET
20
SAYS LAW

• SUPPLY CREATES ITS OWN DEMAND

21
REASONING BEHIND SAYS LAW

• People dont work just to earn money. They work
  for the things that money can buy.
• People dont save just to hold the money. They
  save in order to invest.
• All that is earned will be spent.