Aggregate Demand and Aggregate Supply - Aggregate Supply - from Short Run to Long Run
3 important questions on Aggregate Demand and Aggregate Supply - Aggregate Supply - from Short Run to Long Run
How is it possible to produce an aggregate output level this is higher than the potential output
- it is only possible to produce an aggregate output level this is higher than the potential output because nominal wages have not fully adjusted upward.
- until this upward adjustment in nominal wages occurs, producers are earning high profits and producing a high level of output
What do we call the level of real GDP that the economy would produce if all prices, including nominal wages, were perfectly flexible?
The potential output YP
What does a level of aggregate output lower than potential output mean? What does this mean for workers wages? What happens to the short run aggregate supply curve?
- It means a high level of unemployment
- because jobs are scarce and workers and abundant the nominal wage will fall over time
- shifting the short run aggregate supply curve rightward
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