Short Run Aggregate Supply (SRAS):
Time to short for wages to adjust to the price level.
Workers may not be aware of changes in their real wages due to inflation and have adjusted their labor supply decisions and wage demands accordingly.
Workers may not be aware of changes in their real wages due to inflation and have adjusted their labor supply decisions and wage demands accordingly.
- Nominal Wages: The amount of money received per day, per hour, or per year
- Real Wage: Wages adjusted for inflation
- Sticky Wages: Nominal wage level is set according to an initial price level and it does not vary (Examples: Stamps)
The Keynesian or Horizontal Range has a fixed price level, fixed wage level and flexible employment which implies that output depends on change in employment.
The Intermediate Range has a flexible price level, fixed wage level, and flexible employment which implies that output depends upon changes in price level and employment
The Classical or Vertical Range has a flexible price level, fixed wage level and fixed employment which implies that output depends upon changes in price level.
*fixed because of sticky wages
Demand Pull inflation is inflation due to an increase in price level via demand |
Cost push Inflation is inflation due to a rise in the cost of production |
Long Run Aggregate Supply (LRAS):
Time long enough for wages to adjust to the price level.
- In the Long Run, you have a flexible wage and price level
- They both offset each other
- LRAS shifts due to PPF shifts
Demand Pull Inflation: You're pulling something to you, AD moves to the right. Ever you'll equal growth
Cost-Push: You're pushing away, decrease to the left
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