Aggregate supply in the long run, Macroeconomics

In the short run, the discrepancy between actual and expected price level causes changes in output and employment. But in the long run, if all other things remain constant, the higher price level will come to be accurately expected by firms, narrowing down the difference between expected and actual price levels. This is important because in the long run, the costs incurred by business firms rise as economic agents react to higher prices. Wage earners, for example, now pay more for the same basket of goods and services they used to purchase earlier. A hike in wage rates will be bargained for and the same will be reflected in higher prices by the suppliers of goods and services.

As we have seen, the higher level of output in the short run was possible only because the unanticipated rise in the price level led to higher profits to business firms. As soon as the costs increase in line with final prices, the incentive to produce higher levels of output disappears and the production reverts to its original level. In this situation, the level of output will be at its natural rate and deviations from this state are possible only when actual price level differs from the expected price level in the short run. Thus, in the long run, the natural rate of output is the equilibrium rate of output for the economy. As shown in figure 6.5 the short run aggregate supply curve is given by ASS and ASL is the long run aggregate supply curve. The level of output is given by Q which is the natural rate of output.

Posted Date: 9/18/2012 5:23:39 AM | Location : United States







Related Discussions:- Aggregate supply in the long run, Assignment Help, Ask Question on Aggregate supply in the long run, Get Answer, Expert's Help, Aggregate supply in the long run Discussions

Write discussion on Aggregate supply in the long run
Your posts are moderated
Related Questions
Q. Illustrate biological effects of Patulin? Biological activity: Patulin has an acute oral LD 50 in rodents of about 30-50 mg/kg and has been shown to be teratogenic, immunot


full overview as-ad model

What is the impact on the economy if price ceiling or price floor were removed? Ans) Price ceiling is government system or laws setting price floors or ceilings that forbid the

Changes in demand-Baby diapers and retirement villagesOther things equal, an increase in the number of buyers for a product or service will increase -demand. Baby diapers and retir

An increase in growth rates will cause the production possibilities curve to a. shift inward. b. become steeper. c. become flatter. d. shift outward.

Q. What do you meant by Investment? When we use the word investment, we characteristically mean 'gross investment'. Fundamentally, gross investment comprises all finished goods

Identify a generic organization (e.g., manufacturing plant, hospital, educational institution). You will use this same organization in your Final Project. Assume that you are part


Process to control inflation rate The belief that control of inflation must be the primary economic objective of government can be traced back to neo-liberal revolution that st