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
DEMOGRAPHIC FEATURES IN DEVELOPMENT: We have learned in the previous unit that human resources play a significant role in generating aggregate flow of goods and services. The

how to work out National Income?

How commercial banks "create money" Commercial banks obviously cannot influence the amount of currency in the economy or the monetary base, since they are not allowed to print

Give brief Introduction about Interest rate When you borrow money, you usually have to pay a fee for the loan. This fee is often called interest, particularly if the fee is pr

The structural deficit: A. falls as the economy expands and rises when it contracts. B. changes as actual income changes regardless of potential income. C. does not change when inc

A, Explain how a person can be free to choose but his or her choices are casually determined by past event 2 B , Draw the casual tree for newcomb''s problem when Eve can''t perfe

what are the qualitative methods of controling credit

What are the costs of economic growth? Economic growth can result also into: • Increases within pollution noise and congestion • Unnecessary depletion of non-renewable r

What are the Two types of money In most countries, one can identify two "types of money": Currency and coins Bank deposits Total value of all the money in a

What advantages might a socialist system have in responding to the needs of people struck by an emergency situation like the earthquake that occurred in Haiti in January, 2010?