Lecture 14: Aggregate Supply Shock

How would this transition affect other graphs?

1. Firm cuts production so inventories run down = ↑P and output. 2. HIgher P = Left shift for MPR. 3. Due to higher i, downward shift in AE curve

What are the 3 types of supply shocks and their effect on the curves?

1. Perminant shock: shift both SR and LR curves 2. Temporary shock: will shift SRAS curve in the short run and then shift back in the long-run 3. Observed future shock: Shifts LRAS but not SRAS curve in the short-run.

What happens to inflation?

A cost shock puts upward pressure on prices and get a situation where P↑ + Y↓ = Stagflation If the ↓Y increases Unemployment, there is higher inflation + Unemployment

What is a 'supply shock" + What is a positive supply shock?

Is when a change shifts the SRAS and/or the LRAS curve. +shock 1. Fall in factor costs 2. ↑ in quantity of factors (e.g. labour) 3. New technology improving productivity 4. ↓ in expected fixed margin by firms

What is observed future AS shock and what does it look like on the graph?

Observed future shock is when a firm knows a new tech that will make production cheaper is coming but it will take time to implement causing News shocks

How would a firm react to a temporary negative supply shock like temporary increase in oil prices? And how would this change be affecting the AD-AS curve?

Oil becomes more expensive than other factors of production so the firm would - Substitute to other factors where possible - Increase the price of output - Cut production By doing any/all of these, it would cause a leftward shift in the SRAS curve

What does LRAS represent?

The economy's level of potential or sustainable output. At this level of output, there is no tendency for prices to rise or fall

What is cost-push inflation?

When there is a rise in the factor prices due to a supply shock thus increasing the prices