Draw a dynamic aggregate demand and aggregate supply graph showing the economy moving from poten

Draw a dynamic aggregate demand and aggregate supply graph...

Key Concepts

Aggregate Demand (AD)

Aggregate demand represents the total quantity of goods and services that households, businesses, the government, and foreigners are willing and able to purchase at any given overall price level. It is downward sloping in the aggregate demand and aggregate supply (AD-AS) framework, indicating an inverse relationship between the price level and the real output demanded in the economy.

Short?Run Aggregate Supply (SRAS)

Short-run aggregate supply depicts the relationship between the price level and the quantity of goods and services that firms are willing to produce in the short run, when certain input prices, such as wages, are sticky. In the short run, the SRAS curve is upward sloping because higher prices can temporarily increase production despite fixed costs.

Long?Run Aggregate Supply (LRAS)

Long-run aggregate supply represents the economy's potential output when resources are fully employed, reflecting an economy's productive capacity independent of the price level. This curve is vertical at the level of potential GDP, indicating that in the long run, output is determined by factors such as technology, labor, and capital, rather than by price fluctuations.

Dynamic Adjustments in the AD-AS Model

The AD-AS model is dynamic in that it allows for shifts in the curves over time to reflect changes in economic conditions. When modeling an economy moving from one period with a certain potential output to a later period with higher potential output, both the LRAS and SRAS curves shift to the right. This illustrates that the underlying growth factors such as technological improvements or increased capital stock have enhanced the economy's productive capacity while equilibrium is maintained.

Economic Growth without Inflation

Achieving economic growth without inflation typically requires an increase in potential GDP through improvements in productivity, technology, or an increase in capital, which shifts the LRAS to the right. Simultaneously, the SRAS must shift correspondingly to meet higher aggregate demand without creating upward pressure on prices. This balanced growth ensures that as the economy produces more output, the price level remains stable, yielding a growth path characterized by increased real output without inflation.

Full Employment Equilibrium

Full employment equilibrium occurs when the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves intersect. At this point, the economy is operating at its potential GDP with all available resources fully utilized, and there is neither upward nor downward pressure on the price level. This equilibrium is essential for sustained, non-inflationary economic growth as it indicates that the actual output matches the economy's productive capacity.

Transcript

00:01 So in this question, we are again working with the dynamic aggregate demand and aggregate supply model.

00:06 So let us draw out that graph.

00:10 So over here on our x -axis, we have real gdp.

00:16 On our y -axis, we have price level, which i will abbreviate as pl.

00:23 So, okay, we need our initial 2017 aggregate demand, short -run aggregates, supply, and long -run aggregate.

00:32 Aggregate supplies.

00:33 So i'm going to draw that ad and then i'm going to put 17 for 2017.

00:41 Then we are going to have short run aggregate supply, which is going to be also 2017.

00:56 And then we are going to have our long run aggregate supply also in 2017.

01:02 And we have our long run aggregate supply also in 2017.

01:06 And we have oops instead of 2017 we're just going to write 17 to keep it consistent okay so going back okay so this is our initial price level this is pl17 as well okay so now we want to looking again at the question the potential gdp moves.

01:42 We want to show it moving from 2017 to 2018.

01:46 So the potential gdp is where the long run aggregate supply curve hits the x -axis.

01:55 So this is the potential gdp in this 2017.

01:59 So we are going to have a right -word shift long -run aggregate supply curve to get the potential gdp in 2018.

02:13 This is the long -run one, oops, long run aggregate supply curve for 2018.

02:22 Now whatever shifts the long run aggregate supply curve rightward will have the same impact on the short run aggregate supply curve.

02:30 So this short run aggregate supply curve is also going to shift outward...

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