macro ch. 10.2
reasons potential GDP increases
-an increase in the full employment quantity of labor -an increase in the quantity of capital -a advance in technology (all of these increases shift/increase the LAS and SAS)
shifts LAS
-change in the capital stock -increase in the stock of human capital -technological progress
aggregate supply helps us understand
-inflation -business cycle fluctuations -growth of potential GDP
short run aggregate supply
K (capital) and T (state of technology)are fixed and only L (labor) can adjust because L (labor) depends on price level
change in money wage rate
SAS changes but LAS does not change
the business cycle
a continuous series of different short run macroeconomic equilibriums
inflationary gap
above full employment GDP or equilibrium
recession
an economy-wide decrease in the level of economic activity (going down)
natural rate
at potential GDP unemployment is at its what
macroeconomic short run
atual real GDP may be less or more than potential GDP
recessionary gap
below full employment GDP or equilibrium
money wage rate and oil price (material price)
factors that shift the SAS but not the LAS: changes in nominal factor costs. example: a rise in the
to be as small as possible (zero)
goal of output gap
short run aggregate supply curve
is upward sloping because money wages do not immediately change when the price level changes
long run aggregate supply curve
is vertical because potential GDP is independent of the price level
real wage rate
nominal wage rate/ price level*100
long run macroeconomic equilibrium
occurs when LAS intersects with AD
short run macroeconomic equilibrium
occurs when SAS intersects with AD
negative output gap
producing less than our potential
positive output gap
producing more than our potential
potential GDP
quantity of real GDP supplied at full employment
short run macroeconomic equilibrium
real GDP and the price level are determined by SAS and aggregate demand
potential GDP
real GDP fluctuates around
output gap
real GDP-potential GDP
macroeconomic long run
regardless of price level, the economy is producing at potential GDP
increase in the money wage rate
shifts SAS leftward
LAS curve
shows full employment level of real GDP
sequences of the business cycle
starting at full employment: below full employment equilibrium, full employment equilibrium, above full employment equilibrium
price level and the aggregate quality supplied
the aggregate supply curve shows the relationship between the
economic expansion
the economy between the trough and the peak experiences this (going up)
inflation rate
the percentage change of price level
labor, capital, and the state of technology
the supply of real GDP is a function of
potential GDP
the value of real GDP when all the economy's production factors are fully employed
macroeconomic long run
there is full employment and real GDP is equal to potential GDP
movements along the LAS
vertical because the price level and the money wage rate change in the same proportion
increasing real GDP
what causes economic growth
inflation
when aggregate demand increases faster than aggregate supply
recessionary gap
when potential GDP exceeds real GDP
inflationary gap
when real GDP exceeds potential GDP
real GDP is greater than potential GDP
when the unemployment rate is below the natural rate of unemployment
production factors
who are the suppliers in the aggregate market