Macroeconomics
resources without raising theirprices).Thereistimeforinputpricestochange,butduetolow aggregate demand, they do not. For example, in times of high unemployment, any job offer might be enough to attract new workers.Inthiscase,outputincreaseswithoutincreasingthe price level. 2. The upward-sloping part of the AS curve (part B in the previous diagram): As output increases from Y to Y₁, frms start to face shortages of resources resulting in bids for higher wages and more expensive rawmaterialsandcapitalequipmentprices.Thismeansthatfrms start approaching potential output as they use their spare capacity. Both prices and output increase in this part. 3. The vertical part of theAScurve(partCinthepreviousdiagram): WhenoutputreachesY₁, the economy is producing themaximumoutputitcanwiththeexistingresources.Inthispart, the economy reaches full capacity; therefore, it is impossible to increase outputwithexisting inputs.Thispartofthecurveisperfectlyinelastic,whichisthesameastheLRAScurveadopted bytheClassicalviewwhenpricesbecomeflexible.Anattempttoaffectoutputwithnoincrease in the quantity and quality of inputs will result in higher price levels, and hence inflation. E. Macroeconomic Equilibrium At a macro level, the equilibrium level of output is determined at the intersection of the aggregate demand and aggregate supply curves. This intersection is illustrated by the aggregate demand-aggregate supply model (AD-AS model) both inthe short and long run. Actual vs. Full-Employment Output How do we know if the current or actual level of real GDP is the optimal one? First, we identify the short-run equilibrium output to determine where in the business cycle the economy is. Then, we determine whether the economyisat,below,orabovefullemploymentbyexamininghowcloseorfar we are from the long-run equilibrium. Short-Run Macroeconomic Equilibrium Recall that in the short run, price adjustments have not happened yet . Therefore, the short-run macroeconomic equilibrium represents the real GDP that exists right now . The short-runmacroeconomicequilibrium occurswhenthequantityofthe aggregateoutputsupplied isequaltothequantityofaggregateoutputdemanded .Graphically,thisisthepricelevelandrealGDP at the intersection of the AD and the SRAS curves .
In the AD-AS models below, the short-run macroeconomic equilibrium is represented by point X.
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