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Supply
The AD/AS Model
Demand-Pull AS
Inflation
Price Level
P2
P1
AD1
AD
• Consumer Wealth
• Consumer Expectations
• Consumer Indebtedness
• Taxes
Real GDP
Y
Shifts in the Short-run AS
Curve
• A leftward shift of • A decrease in
the AS curve could costs, economic
be caused by cost
shocks. growth, or public
policy, can cause a
rightward shift of
the AS curve.
Factors that shift the Aggregate Supply
Curve
Factors That Shift the Aggregate Supply Curve
Shifts to the Right Shifts to the Left
Increases in Aggregate Supply Decreases in Aggregate Supply
Lower costs Higher costs
• lower input prices • higher input prices
• lower wage rates • higher wage rates
Y0
Real GDP Y
Long-Run AS Curve
• LRAS- is a curve that • Remember in the
shows the relationship long run capital is
in the long-run between not fixed.
the price level and the
quantity of real GDP • LRAS represents
supplied. potential GDP (what
• Changes in the price the economy could
level do not affect the be doing if all
level of aggregate resources are being
supply in the long-run. used efficiently, &
Therefore it is vertical.
the economy is
experience full
employment.
Graphical Presentation of
LRAS
LRAS LRAS
Price Level
Decrease Increase
Real GDP
The AS/AD Model Together
Shift in AD
• Output can be
pushed above
potential GDP by
higher aggregate
demand. The
aggregate price level
also rises.
• Eventually, this
pressure will ease,
and we'll return back
to potential.
Shifts in AS
• When output is pushed
above potential, there is
upward pressure on costs.
Rising costs push the short-
run AS curve to the left.
• If costs ultimately increase
by the same percentage as
the price level, the quantity
supplied will end up back at
Y0.