SRAS SFLS

SRAS SFLS

1. AD/AS Model ( P art 2 – Short Run Supply )

2. AD / AS Model 3 .) Short Run Aggregate Supply 1 .) Philosophy Bias introduction 2 .) Long Run Aggregate Supply 4.) Aggregate Demand

3. David Ricardo (1772 –1823 ) Adam Smith (1723 - 1790 ) John Stuart Mill (1806 – 1873) David Hume (1711 - 1776) Jean-Baptiste Say (1767 –1832) Frederic B astiat (1801 - 1850) Classical Economists Most economists believe classical theory describes the world in the long run , but not the short run . In the short run , changes in nominal variables can affect real variables

4. Price level GDP LRAS Y SRAS Aggregate Supply is: vertical in long run upward-sloping in short run AD/AS Model

5. Price level GDP Y SRAS AD/AS Model Aggregate Supply is: In some special cases horizontal in the short run where real variables can change without changing nominal variables .

6. Short Run Aggregate Supply ( S RAS ) 3 .) Short Run Aggregate Supply - Upward supply curve of the macro economy that responds to prices in the short run. upward sloping because: Over the period of 1-2 years, an increase in P causes an increase in the Q of G & S supplied.

7. P Y SRAS Y 2 P 1 Y 1 P 2 upward sloping because: - Over the period of 1-2 years, an increase in prices ( P ) causes an increase in the quantity ( Y ) of G & S supplied. Short Run Aggregate Supply ( S RAS ) 3 .) Short Run Aggregate Supply

8. AD / AS Model 3 .) Short Run Aggregate Supply 1 .) Philosophy Bias introduction 2 .) Long Run Aggregate Supply 4.) Aggregate Demand 3. 2 ) SRAS upward slope 3. 3 ) SRAS shifts 3. 1 ) SRAS horizontal slope

9. The General Theory of Employment, Interest, and Money (1936) is a book written and published by John Maynard Keynes. This was written in response to the policies and theories that couldn’t explain why the great depression was so deep and lasted for so long. This book basically invented macro economics and was as influential as Adam Smith’s Wealth of Nations. He wrote the first theories that tried to explain why things like the great depression can happen, why the economy doesn’t always simply go back to the “long run”

10. Price level GDP Y SRAS Aggregate Supply AD/AS Model This part of the curve assumes that prices and wages are fixed until full employment is reached. T here is spare capacity in the economy, the price level is stable, and real output can expand without adding any inflation. Called the Keynesian part of the graph

11. Price level GDP Y SRAS Aggregate Supply can get ‘stuck’ horizontal in the short run AD/AS Model

12. P Y SRAS Y 2 P 1 Y 1 P 2 upward sloping because: - Over the period of 1-2 years, an increase in prices ( P ) causes an increase in the quantity ( Y ) of G & S supplied. Short Run Aggregate Supply ( S RAS ) 3 .) Short Run Aggregate Supply

13. Short Run Aggregate Supply ( S RAS ) 3. 2 ) Short Run Aggregate Supply - Upward supply curve of the macro economy that responds to prices in the short run. 1.) Resource prices are s ticky 3 .) Change in output costs 4 .) Misperceptions 2.) Price changes can be sticky Theories to explain slope of SRAS In each there is some type of market imperfection This part about the slope has been but into a separate PPT, this section is not on the AS test, (it’s on the A level test) but still useful for a complete understanding.

14. AD / AS Model 3 .) Short Run Aggregate Supply 1 .) Philosophy Bias introduction 2 .) Long Run Aggregate Supply 4.) Aggregate Demand 3. 2 ) SRAS upward slope 3. 3 ) SRAS shifts 3. 1 ) SRAS horizontal slope

15. Price level GDP LRAS Y SRAS Short Run Aggregate Supply ( S RAS ) SRAS 1 SRAS 2 3. 3 ) Short Run Aggregate Supply Y 2 Y 1

16. - Change in Taxes/Subsidies Shifting SRAS Short Run Aggregate Supply ( S RAS ) 3. 3 ) Short Run Aggregate Supply - Change in Productivity - Change in Exchange rates - Change in LRAS also change SRAS - Change in Wages - Change in raw materials costs

17. Short Run Aggregate Supply ( S RAS ) Changes in Taxes/Subsidies Higher Taxes Lower Taxes - Business taxes - Indirect taxes Shifting SRAS shift right : shift left : examples: 3. 3 ) Short Run Aggregate Supply

18. Short Run Aggregate Supply ( S RAS ) Changes in Wages Higher Wages Lower Wages -Trade Union pressures - COLAs Shifting SRAS shift right : shift left : - higher nominal wages, higher input costs. - lower nominal wages, lower input costs. examples: 3. 3 ) Short Run Aggregate Supply 工人罢工

19. P E shifts SRAS : If P E rises, workers & firms set higher wages. At each P , production is less profitable, Y falls, SRAS shifts left. LRAS P Y SRAS P E Y N SRAS P E Short Run Aggregate Supply ( S RAS ) 3. 3 ) Short Run Aggregate Supply

20. Short Run Aggregate Supply ( S RAS ) Changes in Productivity Higher Productivity Lower Productivity Shifting SRAS shift right : shift left : 3. 3 ) Short Run Aggregate Supply

21. Short Run Aggregate Supply ( S RAS ) Changes in Exchange rates Depreciation - decreases import sector supply - increases export sectors supply Appreciation - increases import sector supply - decreases export sectors supply Shifting SRAS 3. 3 ) Short Run Aggregate Supply Country A Money Country B Money

22. Short Run Aggregate Supply ( S RAS ) Changes in r aw material costs Depreciation - decreases imported raw materials prices - increases import raw material quantity Appreciation - increases imported raw material prices - decreases imported raw material quantity Shifting SRAS 3. 3 ) Short Run Aggregate Supply

23. Short Run Aggregate Supply ( S RAS ) Shifting SRAS 3. 3 ) Short Run Aggregate Supply - Change in LRAS also change SRAS - The same factors in the equation can also change things in the short run. Example: - Higher population ( shift LRAS right ) also means more workers available today. ( shift SRAS right ) Y*t = f (L, K, M)

24. Price level GDP Y AS Aggregate Supply is: LRAS + SRAS Aggregate Supply is: Classical zone Economy’s resources already are fully used so only prices increase Intermediate zone Increase in GDP can lead to an increase of inflation too. Keynesian zone So an increase in GDP wouldn’t mean an increase in inflation. So combining these two curves into one single curve. The economy typically is in the intermediate zone all the time

25. Price level GDP Y AS Aggregate Supply is: Classical zone Economy’s resources already are fully used so only prices increase Intermediate zone Increase in GDP can lead to an increase of inflation too. LRAS + SRAS Keynesian zone So an increase in GDP wouldn’t mean an increase in inflation.

26. Aggregate Supply a summary…

27. Price level GDP LRAS Y P 1 P 2 3 .) Long Run Aggregate Supply Long Run Aggregate Supply ( LRAS ) Change in money supply and prices DON’T change endowments 能力 of factors of production ***Prices are flexible

28. Long Run Aggregate Supply ( LRAS ) Shifting LRAS 3 .) Long Run Aggregate Supply Y*t = f (L, K, M) - Anything that changes these factors of production

29. Aggregate Supply A Recap 概括 Price level GDP LRAS Y SRAS Aggregate Supply is: vertical in long run nominal changes do not affect real variables upward-sloping in short run nominal changes do affect real variables

30. P Y SRAS Y 2 P 1 Y 1 P 2 upward sloping because: - Over the period of 1-2 years, an increase in prices ( P ) causes an increase in the quantity ( Y ) of G & S supplied. Short Run Aggregate Supply ( S RAS ) 3 .) Short Run Aggregate Supply

31. - Change in Taxes/Subsidies Short Run Aggregate Supply ( S RAS ) 3 .) Short Run Aggregate Supply - Change in Productivity - Change in Exchange rates - Change in LRAS also change SRAS - Change in Wages - Change in raw materials costs Shifting SRAS

32. Price level GDP Y AS Aggregate Supply is: Classical zone Economy’s resources already are fully used so only prices increase Intermediate zone Increase in GDP can lead to an increase of inflation too. LRAS + SRAS Keynesian zone So an increase in GDP wouldn’t mean an increase in inflation.