Macroeconomics Aggregate Supply and Demand Summary

Chapter 29:Aggregate Supply and Aggregate Demand

Aggregate Supply

 Quantity of real GDP supplied : Total quantity of goods and services, valued in base year (2010)
that firms plan to produce in a given period
 This Q depends on Q of labour employed, Q of physical & human capital, & state of technology
 Labour market can be:
o At full employment
 Q of RGDP supplied is PGDP
o Above full employment
o Below full employment
 AS: relationship between Q of RGDP supplied & price level

Long Run Aggregate Supply

 Relationship between the Q of RGDP supplied and PL when money wage rate changes at the
same rate as the PL to maintain full employment
 Q of RGDP supplied at full employment = PGDP
 LRAS curve is vertical & located at PGDP
 PGDP is independent of PL

Short Run Aggregate Supply

 Relationship between Q of RGDP supplied & PL when money wage rate, prices of other
resources & PGDP remain constant

Changes in AS

 AS changes when an influence on production plams other than the PL changes
 Includes changes in PGDP & money wage rate

CHanges in PGDP

 An increase in PGDP increase LR & SR AS
 PGDP can increase for:
o An increase in full employment Q of labour
o Increase in Q of capital
o An advance in tech

Changes in money wage rate

 When MWR changes, SRAS changes, not LRAS
 When MWR increases, SRAS decrease (shifts left) because it increases firm costs
 What changes MWR?
o Departures from full employment (Unemplyment above natural rate brings downward
pressure, and vice versa)
o Expectations about inflation (rise brings rise, vice versa)