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Warm-Up

Warm-Up. Identify how each scenario affects the AD curve … The stock market hits record highs The government increases spending on health care The price level rises by 10% Demand for U.S.-made goods spikes around the world. Aggregate Supply.

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Warm-Up

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  1. Warm-Up Identify how each scenario affects the AD curve … • The stock market hits record highs • The government increases spending on health care • The price level rises by 10% • Demand for U.S.-made goods spikes around the world

  2. Aggregate Supply Chapter 28: Aggregate Demand and Aggregate Supply (pages 740-749)

  3. Aggregate Supply • Short and long run curves

  4. A Diversion… • 1,000s of variables in the economy • Short run = some factors fixed • Long run = all factors variable

  5. What Is Fixed In The SR? • “Sticky” wages are fixed • Labor contracts fix wages • Wages fixed until contract is up

  6. SRAS Slopes Upward B/C… • Based on the profit motive • Wages are biggest cost to suppliers  prices =  profit per unit =  quantity supplied

  7. Long Run Aggregate Supply • “Sticky” SR costs become variable

  8. When Does SRAS Shift? • D in aggregate prices = movement • Shifts show D in SRAS @ any price

  9. Causes in Shifts of AS • Changes in commodity prices • Changes in nominal wages • Changes in productivity

  10. Changes in Commodity Prices • Commodities = bulk inputs • EXAMPLES: oil, steel, copper •  commodity prices =  profit • Shifts SRAS to the left

  11. Changes in Nominal Wages • Wages are the largest cost for firms •  nominal wages =  costs • Shifts SRAS to the left

  12. Changes in Productivity •  productivity =  costs • EXAMPLE: Hand price scanners • Workers manage inventory quicker • Fewer workers needed • Per-unit profits increase • Shifts SRAS to the right

  13. LRAS May Shift B/C… • Increased resources • Improved quality of resources • Improved technology

  14. Brain Break – Balancing Act

  15. Equilibrium in the AD-AS Model Chapter 29: Aggregate Demand and Aggregate Supply (pages 750-759)

  16. AD-AS Model Aggregate Price Level SRAS PE ESR AD YE Real GDP

  17. Shifts in AD • Caused by DEMAND SHOCKS • EXAMPLE: Great Depression •  wealth   consumption • AD shifted to the left

  18. Shifts in AD Aggregate Price Level SRAS P1 E1 E2 P2 AD Y1 Real GDP Y2

  19. Shifts in AD • EXAMPLE: Interstate Highway System •  gov’t spending   GDP • AD shifts to the right

  20. Shifts in AD • Negative shock   GDP,  Agg. Price • Positive shock   GDP,  Agg. Price

  21. Shifts in AS • Caused by SUPPLY SHOCKS • EXAMPLE: 1970s oil embargo •  oil   commodity prices • AS shifted to the left

  22. Shifts in AS Aggregate Price Level SRAS E2 P2 P1 E1 AD Y1 Real GDP Y2

  23. Shifts in AS • EXAMPLE: Internet expansion •  technology   productivity • AS shifted to the right

  24. Shifts in AS • Negative shock   GDP;  Agg. Price • Positive shock   GDP;  Agg. Price

  25. Stagflation!! • Occurs with negative supply shocks • GDP drops but prices rise • People feel “squeezed” • Difficult for government to address

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