National Income & Price Determination
National Income & Price Determination
National Income & Price Determination
Increase: Decrease:
Short-run Aggregate Supply (SRAS)
When firms haven’t made price changes in response to an economic shock (sticky prices).
Is upward sloping because of
UPWARD SLOPE BECAUSE OF...
● The misperception theory (producers mistaken price increase as greater profit)
● Sticky Price Theory (producers temporarily reduce quantity b/c of menu costs)
● Sticky Wage Theory (production costs can be higher from union contracts)
● Shifters
● Changes in commodity prices (lower commodity price increases SRAS)
● Changes in nominal wages (lower nominal wages increases SRAS)
● Changes in productivity (more productive workers increases SRAS)
Increase - Decrease -
Long-run aggregate supply (LRAS)
● After producers have adjusted their prices according to economic shocks
● All production costs are fully flexible
● It is an economy’s potential output (represent the full-employment output)
● Shifters that cause and increase
● Increases in the quantity of resources (e.g., land, labor)
● Increases in the quality of resources (e.g., education)
● Technological progress can increase LRAS
● If aggregate price level is above equilibrium, AS will exceed AD and cause the aggregate
PL to fall, pushing it back to the equilibrium. If aggregate price level is below
equilibrium, AD will exceed AS and cause the aggregate price level to rise, pushing it
back to the equilibrium.
● Positive demand shock increases aggregate price and aggregate output (demand-pull).
Negative demand shock decreases aggregate price and aggregate output.
● Positive supply shock decreases aggregate price and increases aggregate output. Negative
supply shock increases aggregate price and decreases aggregate output (supply-push).
Recessionary gap: Exists when SRAS equilibrium is less than LRAS equilibrium.
If so, wages would fall and SRAS would shift to the right, bringing the economy back to LRAS
equilibrium.
Inflationary gap: Exists when SRAS equilibrium is greater than LRAS equilibrium.
If so, wages would rise and SRAS would shift to the right, bringing the economy back to
LRAS equilibrium.
● Economy self-corrects in the long-run
EQUILIBRIUM
● Short-run equilibrium is when AD & SRAS are equal
● Long-run equilibrium is when AD & SRAS are equal and interest on LRAS
FISCAL POLICIES (affect AD)
Expansionary Fiscal policies that increase aggregate demand:
● Increase in government purchases (has greatest effect)
Multiplier =
SOURCES:
● https://apcentral-stg.collegeboard.org/pdf/ap-macroeconomics-course-and-exam-
description.pdf
● https://matermiddlehigh.enschool.org/ourpages/auto/2015/8/25/54609372/Krugman_s%2
0Economics%20for%20AP.pdf
● https://prezi.com/view/1VuIm7ij82RHI6nXtCmV/
● https://www.google.com/imghp?hl=EN