WHY THE SHORT-RuN AGGREGATE-SUPPLY CURVE MIGHT SHIFT

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WHY THE SHORT-RuN AGGREGATE-SUPPLY CURVE MIGHT SHIFT

The short-run aggregate-supply curve tells us the quantity of goods and services supplied in the short run for any given level of prices. This curve is similar to the long-run aggregate-supply curve, but it is upward sloping rather than vertical because 0 of sticky wages, sticky prices, and misconceptions. Thus, when thinking about what shifts the short-run aggregate-supply curve, we have to consider all those variables that shift -the long-run aggregate-supply curve plus a new variable-the expected price level-that influences the wages that are stuck, the prices that are stuck, and the perceptions about relative prices.

Let’s start with what we know about the long-run aggregate-supply curve. As we discussed earlier, 0 shifts in the long-run aggregate-supply curve normally arise from changes in labor, capital, natural resources, or technological knowledge. These same variables shift the short-run aggregate-supply curve. For example, when an increase in the economy’s capital stock increases productivity, the economy is able to produce more output, so both the long-run and short-run aggregate-supply curves shift to the right. When an increase in the minimum wage raises the natural rate of unemployment, the economy has fewer employed workers and thus produces less output, so both the long-run and short-run aggregate supply curves shift to the left.

The important new variable that affects the position of the short-run aggregate-supply curve is the price level that people expected to prevail. As we have discussed, the quantity of goods and services supplied upends, in the short run, on sticky wages, sticky prices, and misconceptions. Yet wages, prices, and perceptions are set on the basis of the expected price level. So when people change their expectations of price level, the short-run aggregate-supply curve shifts.

similar logic applies in each theory of aggregate 0 supply. The general lesson is the following: An e in the expected price level reduces the quantity of goods and services supplied and shifts the -run aggregate-supply curve to the left. A ‘decrease in the expected price level raises the quantity of and services supplied and shifts the short-run aggregate-supply curve to the right. As we will see in section, this influence of expectations on the position of the short-run aggregate-supply curve I a key role in explaining how the economy makes the transition from the short run to the long run. In rt run, expectations are fixed, and the economy finds itself at the intersection of the aggregate curve and the short-run aggregate-supply curve. In the long run, if people observe that the mice different from ~hat they expected, their expectations adjust, and the short-run aggregate-supply shifts. This shift ensures that the economy eventually feds itself at the intersection of the aggregate- curve and the long-run aggregate-supply curve.should now’ have some understanding about why the short-run aggregate-supply curve slopes and what events and policies can cause this curve to shift. Table 2 summarizes our discussion.

TABLE 2 The Short-Run Aggregate-Supply Curve: Summary

, Why Does the Short-Run Aggregate-Supply Curve Slope Upward?

I. The Sticky-Wage Theory. An unexpectedly low price level raises the rear wage. touch causes firms to lure rewarm-produce a smaller quantity of goods and services

2. TIt/!!Sticky-Prier Theory: An unexpectedly low price level leaves some firms with higher-than-desired prices, which  their sales and leads them to cut back production

3. Tlte Misconceptions Theory: An unexpectedly low price level leads some supplies to think their relative prices have fallen, which induces a fall in production

. I. Shifts Arising rom Labor: An increase in the quantity of labor available (perhaps due to a fall in the natural rate of unemployment) shifts the aggregate-supply curve to the right. A decrease in the quantity of labor available (perhaps due to.rise in the natural rate of unemployment) shifts the aggregate-supply curve to the left.

2. Shifts Fingering Rom Capital: An increase in physical or human capital shifts the aggregate-supply curve to the right. A decrease in physical or human capital shifts the aggregate-supply curve left.

3. Shifts Arising room Natural Resources: An increase the availability of natural resources shifts the aggregate-supply curve to the right. A decrease in the availability of natural resources shiftless aggregate-supply curve to the left.

4. Shifts Arising from Technology: An advance in technological knowledge ship  the aggregate-supply curve.to the right. A decrease in the available technology (perhaps due to government) shift the aggregate-supply curve to the Ieft.

5. Shift’s gumming the Expected Price: A decrease in the expected price level shins the short-run aggregate-supply curve 10 the right. An increase 10 the expected price level shill  the short-run aggregate-supply.curve In the left.

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WHY THE SHORT-RuN AGGREGATE-SUPPLY CURVE MIGHT SHIFT