UNIT 5 & 6

 SHORT RUN AGGREGATE SUPPLY- period in which wages remain fixed as PL increases or decrease 

      EFFECTS:

            PL allows changes allow for companies to exceed normal outputs and hire more works b/c profits are increasing while wages remain constant  (SR)

            Wages will adjust to the PL and previous output levels will adjust accordingly (LR)

EQUILIBRIUM IN THE EXTENDED MODEL 

    extended model means the inclusion of both SR and LR curves 

DEMAND PULL inflation in the AS model DP prices increase based on increase in AD

  - SR demand pull will drive up prices and increase production 

  - LR increase in AD will eventually return to previous levels 

COST PUSH arises from factors that will increase per unit costs suck as increase in the price of a key resource 

DILEMMA FOR THE GOVT

   -In effort to flight cost push the govt can react in two different ways 

   - Action such as spending by the govt could begin an inflationary spiral

   - No action however could lead to recession by keeping production and employment levels 

LONG RUN PHILLIPS CURVE measures inflation and unemployment

    -natural rate of unemployment is held constant 

    -B/c LRPC exists at the natural rate of unemployment structural changes in the economy that affect unemployment will also cause the LRPC to shift 

RELATING PHILLIPS CURVE TO AS/AD

  - changes in AS/AS model can also be seen in the Phillips curve 

SRPC 

  -inverse relationship bwt unemployment and inflation 

LRPC

  -occurs at the nature rate of unemployment 

  -always represented by a vertical line 

  -no trade of bwt unemployment and inflation 

  -only shift if LRPS shifts 

  -If the NRU shifts so does the LRPC 

-Major assumption is that more worker benefits create higher nature rates and few worker benefits create lower nature rates 

MISERY INDEX comb. of inflation and unemployment in any given year single digit is good 2% 

SUPPLY SHOCKS rapid and efficient increase in resources cost due to oil embryo 

DISINFLATION reduction in inflation from year to year found in LRPC

DEFLATION general decline in prices 

INFLATION general rise in prices