SRAS/LRAS Flashcards
What is the long run?
Period in which nominal wages (&mother input prices) are fully responsive to changes in price level
What are nominal wages?
Current level
What are real wages?
Inflationary adjusted
What are the assumptions of the SRAS curve?
- initial price level is P1
- nominal wages have been established on the expectation that PL will persist
- PL is flexible both upward and downward
Why is the SRAS curve positively sloped?
Nominal wages stay constant as PL changes
Why is the LRAS curve a vertical curve?
Nominal wages eventually change by the same amount as the change in PL
What happens with a leftward shift of the SRAS?
In the LR workers discover that their real wages have declined because of increased PL
What happens with a rightward shift of SRAS?
Profits have fallen because PL decreases and wages don’t, this increases real wages
Where is equilibrium in the extended AD-AS model?
Intersection of AD, LRAS, & SRAS
What happens to the extended AD-AS model because of demand pull inflation?
- Short run: increase in AD1 to AD2 drives up PL and increases real output, investment spending and/or net exports increase. Demand pull inflation drives up PL & increases output.
- Long run: nominal wages rise and AS1 shifts left to AS2. Only PL rises
When does cost pull inflation occur?
When SRAS shifts leftward from AS1 to AS2
When does recession occur?
When AD shifts left from AD1 to AD2
What is stagflation?
- Combo of recession and inflation
- leftward shift of SRAS from EQUILIBRIUM
What does the Phillips curve show?
Cost-push inflation and the macro distinction between SR and LR
What is the basic idea of the Phillips curve?
- the larger the increase in AD, the higher the rate of inflation and the greater the increase in real GDP
- high inflation= low unemployment
- low inflation= high employment
What happens in the short run of the Phillips curve?
- if AD moves upward, PL rises and real GDP rises
- if AD moves downward, PL falls and real GDP falls
What happens in the long run of the Phillips curve?
The actual PL equals the expected PL and output is at its potential output with unemployment at its natural rate.
-to compensate for higher that expected PL, labor shortages and dissatisfaction with lower real wages will lead to higher wages in the next round of negotiation
Stagflation
Suggests that the Phillips curve shifted to a less desirable position that negates the trade off between inflation and unemployment
- may be caused by aggregate supply shocks
Late 80s-90s oil prices
Creates a beneficial AS boost to the economy
Stagflation shifts the SRPC (short run Phillips curve) to the
Right
Supply siders
Manipulate the economy by enacting policies designed to stimulate incentives to work, save, and invest
Transfer payments
Erode incentives to work (welfare, unemployment, disability)
Some economists believe that tax cuts will likely cause demand pull inflation because
The cuts will stimulate AD and overwhelm the effect on AS
Ladder curve
Shows the relationship between tax rates and tax revenues
What is the target of supply siders?
Government regulation
Reaganomics caused
Substantial deregulation, a 22% tax cut over 3 yrs, large decline in inflation and interest rates, long peace time expansion, surge in entrepreneurship, but savings dropped and productivity didn’t rise after 1983
What is the short run?
Period in which nominal wages (&mother input prices) remain fixed as the price level changes
