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Unit 5

Unit 5. Chapter 28. Aggregate Supply Curve. PL. AS. Aggragate Supply Curve – Shows for each possible price level, the quantity of G & S that all the nation’s businesses are willing to produce. RGDP. Equilibrium of AS & AD.

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Unit 5

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  1. Unit 5 Chapter 28

  2. Aggregate Supply Curve PL AS Aggragate Supply Curve – Shows for each possible price level, the quantity of G & S that all the nation’s businesses are willing to produce. RGDP

  3. Equilibrium of AS & AD AS intersects AD at equilibrium point E, therefore EGDP is at 6000 and PLE is at 100. PL AS 120 110 E 100 90 80 AD 6000 5200 5600 RGDP 6400 6800

  4. Self-correcting Mecahnism • How does it work? • As we get deeper into a recession workers’ need for pay will overwhelm their desire for higher wages so they will accept wage cuts. • We know that when wages decrease, costs decrease, therefore prices will decrease and producers will want to produce more at all level of GDP. This shifts AS out. • When EGDP is less than PGDP the self-correcting mechanism will shift AS out, so that AS intersects with AD at PGDP. AS0 PL AS1 PLE0 PLE1 AD EGDP0 PGDP EGDP1 RGDP

  5. Full Employment • We are at full employment when the AS curve intersects with the AD curve at the point where EGDP is equal to PGDP. PL AS PLE AD PGDP/EGDP RGDP

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