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Money and Banking
Lecture 8
Aggregate Demand and Supply
Analysis
Ch. 22
Selcuk Caner
Bilkent University
5/23/2017
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Factors that Shift SRAS

Costs of production
– Tightness of the labor market
– Expected price level
– Wage push
– Change in production costs unrelated to
wages (supply shocks)
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Self-Correcting Mechanism

Regardless of where output is initially,
it returns eventually to the natural rate

Slow
– Wages are inflexible, particularly
downward
– Need for active government policy

Rapid
– Wages and prices are flexible
– Less need for government intervention
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Shifts in Long-Run Aggregate
Supply


Economic growth
Real business cycle theory
– Real supply shocks drive short-run fluctuations in the
natural rate of output (shifts of LRAS)
– No need for government intervention

Hysteresis
– Departure from full employment levels as a result of past
high unemployment
– Natural rate of unemployment shifts upward and natural
rate of output falls below full employment
– Expansionary policy needed to shift aggregate demand
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Conclusions

Shift in aggregate demand affects output
only in the short run and has no effect in
the long run

Shifts in aggregate demand affects only
price level in the long run

Shift in short run aggregate supply affects
output and price only in the short run and
has no effect in the long run

The economy has a self-correcting
mechanism
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