Aggregate supply in the long run, Macroeconomics

Assignment Help:

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.


Related Discussions:- Aggregate supply in the long run

Reserves and a reserve requirement, If the Banking system has $500,000 in d...

If the Banking system has $500,000 in demand deposit liabilities, $125,000 in total reserves and a reserve requirement of 15%: What is the maximum amount by which the money supply

Company is researching the effectiveness, A company is researching the effe...

A company is researching the effectiveness of a new web site design to decrease the time to access a website. Five web site users were randomly selected and their times (in seconds

What is the marginal propensity to consume, Question 1: Consider a clos...

Question 1: Consider a closed economy with no government sector in which consumption (C) is related to income (Y) by the equation: C = A + bY (a) What is the marginal pr

Illustrate the about term the open economy in short, Illustrate the about t...

Illustrate the about term the open economy in short. The Open Economy: a. A closed economy is an economy which does not trade goods-services as well as assets. b. The Uni

Describe how exchange rate is expressed, Describe how exchange rate is expr...

Describe how exchange rate is expressed in some nation In some nations, exchange rate is expressed using home currency as base currency. In UK for instance, Danish exchange rat

What is is-lm model with inflation, Q. What is IS-LM model with inflation? ...

Q. What is IS-LM model with inflation? The IS-LM model with inflation  The basic assumption We developed IS-LM model with constant wages and prices. We can now exten

Public Sector, What is top marginal rate of taxation?

What is top marginal rate of taxation?

Production economic .., One constraint in our economy is time. As a society...

One constraint in our economy is time. As a society, we make choices about the allocation of time between work and other pursuits. In the US, most workers are eligible for overtime

What is the value of the test statistic, For the United States, the mean mo...

For the United States, the mean monthly Internet bill is $32.79 per household (CNBC, January 18, 2006). A sample of 50 households in a southern state showed a sample mean of $30.63

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd