Macroeconomics – Unit 3 part 2

1. Long Run Aggregate Supply Macroeconomics – Unit 3 part 2

2. a quick review AS / AD Model What’s on this axis? PL Price Level of all goods Why is Y = GDP? b/c you can measure the economy by the __________ method (NI) or the _______ method (GDP) expenditure income What’s on this axis? Q=realGDP=Y

3. Why is aggregate Demand downward-sloping? Wealth Effect 1 2 Interest Rate Effect PL International Effect 3 Multiplier Effect 4 PL1 What is aggregate demand comprised of? PL2 = C + I + G + (X-M) AD Q=realGDP=Y Q1 Q2

4. What are the variables that can shift aggregate demand? C S I T G MS (X - M) M

5. Aggregate Supply Unlike aggregate demand which is always __________-sloping, the aggregate supply curve shows a relationship that depends crucially on the time horizon examined. downward In the long run, the aggregate supply curve is vertical. In the short run, the aggregate supply curve is upward-sloping. 5 of 12

6. Aggregate Supply What determines the quantity of goods and services supplied in the long run? It depends on supplies of l_____, l______, and c_______ and the available technology to turn these factors of production into g_____ & s________. and abor apital ervices oods

7. In the long run, this quantity of goods and services is the same regardless of what ______ level is. LRAS PL PL1 price Y1 Q=realGDP=Y Natural Rate of Output

8. As price level falls from PL1 to PL2, what happens to the quantity of goods & services an economy can produce? It changes / doesn’t change. LRAS PL PL1 PL2 Y1 Q=realGDP=Y Natural Rate of Output Why?

9. Long Run Aggregate Supply Nothing happens to potential output since it represents output if all resources were fully employed. PL LRAS PL1 Therefore the LRAS curve is __________. PL2 vertical Q=realGDP=Y Y1 9 of 12

10. Long Run Aggregate Supply LRAS is often labeled YFbecause it represents output at _____ ___________ full PL employment LRAS PL1 Q=realGDP=Y YF 11 of 23

11. What factors would cause the LRAS curve to shift? The same factors that would cause the __________ __________ curve to shift. PL LRAS production LRAS1 possibilities PL Q=realGDP=Y Y Y1

12. What factors would cause the LRAS curve to shift? 1. Labor – greater number of workers  LRAS shifts _______ right 2. Capital stock – decrease in capital stock (machines/factories/human capital)  LRAS shifts _______ left Natural Resources – decrease in mineral deposits  LRAS shifts _______ 3 left 12 of 12 4 Technological Advances (especially computers) allow produce more goods from same amts of l., l., & c. Opening up trade to allow in more tech  LRAS shifts _____ right