Unit 5

Short Run Aggregate Supply

The period in which wages (and other input prices) remain fixed as price level increases or decreases.

• Effects over Short Run
• In the short run, price level changes allow for companies to exceed normal outputs and hire more workers because profits and increasing while wages remain constant.
• In the long run, wages will adjust to the price level and previous output levels will adjust accordingly.

Equilibrium in the Extended Model

• The Long AD Curve is represented with a vertical line.

Demand Pull Inflation in the AS Model

• Demand-Pull: prices increase based on increase in aggregate demand.
• In the short run, demand pull will drive up prices, and increase production.
• In the long run, increases in aggregate demand will eventually return to previous levels.

Cost Push and the Extended Model

• Cost-Push arises from factors that will increase per unit cost such as increase in the price of key resource.

Dilemma for the Government

• In an effort to fight cost-push, the government can react in two different ways.
• Action such as spending by the government could begin an inflationary spiral.
• No action however could lead to recession by keeping production and employments levels declining.