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Short Run
answer
Wages and Input prices are sticky (slow to adjust) & inflexible
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Long Run
answer
Wages and Input prices are variable flexible
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Real wage
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nominal wage adjusted for inflation
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Long Run Aggregate Supply (LRAS)
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If nominal wages are decrease aggregate supply shifts downward if not it does the opposite. occurs at intersection of AD and SRAS (full employment) aka natural rate of unemployment
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demand-pull inflation
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shift outward in AD increases nominal wages and price level ( in long run) in short run the price level increases and the real output increases
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cost-push inflation
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aggregate supply shifts leftward. If the government wants to counter the decline in real output they will shift ad out but increase the price (inflation) level. If the government allows a recession they will shift aggregate supply back to its original position. this is caused by them taking a hands off approach eventually undoing the rise in per unit production costs
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Recessions
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Economists recommend active monetary policy to counteract recession and maybe fiscal policy
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Shift in lras & ppc
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causes inflation and economic growth increasing the price level and the equilibrium
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I=r + πe
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nominal interest rate = real - expected inflation
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Fiscal policy
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Government policy that attempts to manage the economy by controlling taxing and spending. an increase in government spending increases aggregate demand
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Philips curve
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the inverse relationship between inflation and unemployment. SRAS is stable
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Stagflation
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increase in unemployment and inflation due to supply shocks
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SRPC shifts
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an increase in inflation causes an increase in aggregate demand
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Supply side economics
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the stress that aggregate supply is an active force in determining inflation unemployment and economic growth. Focuses on marginal tax
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fiscal policy
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Affects marginal taxes giving people incentives to spend and or save. high marginal tax rates gives incentives to spend
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Criticisms of laffer curve
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(1) the impact of a tax cut on incentives is small, of uncertain direction, and relatively slow to emerge
(2) demand-side effects of a tax cut are more immediate than longer term supply-side effects
(3) Unable to find position of an economy on a curve
(2) demand-side effects of a tax cut are more immediate than longer term supply-side effects
(3) Unable to find position of an economy on a curve
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Monetary Policy
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The end goal of this is to increase the money supply which decreases interest rates which increases investment which increases AD.
There are three ways to do this
(1) lower the reserve ratio
(2) decrease the discount rate
(3) open market operations - buy bonds (fed)
There are three ways to do this
(1) lower the reserve ratio
(2) decrease the discount rate
(3) open market operations - buy bonds (fed)
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