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Mods 17-21, 30 Macro Analysis Part III Copyright © 2004 South-Western THE LONG-RUN AGGREGATESUPPLY CURVE In the long run, an economy’s amount of production of goods and services depends on its supplies of labor, capital, and natural resources and on the available technology used to turn these factors of production into goods and services, plus the gov’t policies that promote productivity • The price level does not affect these variables in the long run. Copyright © 2004 South-Western The Long-Run Aggregate-Supply Curve Price Level Long-run aggregate supply P P2 2. . . . does not affect the quantity of goods and services supplied in the long run. 1. A change in the price level . . . 0 Natural rate of output Quantity of Output Copyright © 2004 South-Western THE LRAS CURVE • So…In the long run, the aggregate-supply curve is vertical at what we call the natural rate of output • This is also called its potential output or full-employment output Copyright © 2004 South-Western Comparing PPC to LRAS These are just 2 ways to show the same thing: The ultimate potential—the full capability— of your economy overall. Copyright © 2004 South-Western Why the Long-Run Aggregate-Supply Curve Might Shift • Any change in the economy that alters the natural rate of output shifts the long-run aggregate-supply curve. • The shifts may be categorized according to the various factors of production that affect output. Copyright © 2004 South-Western Why the Long-Run Aggregate-Supply Curve Might Shift • Shifts arising • • • • Labor Capital Natural Resources Technological Knowledge AND • Gov’t Policies Copyright © 2004 South-Western AGAIN…Long-run Economic Growth can be represented by 2 different models in Macroeconomics Macroeconomic Growth = PPC shift = LRAS shift Copyright © 2004 South-Western Long run analysis … • Explains our business cycle over long periods of time growing in GDP output…and our slow, steady price rises Copyright © 2004 South-Western Long-Run Growth and Inflation 2. . . . and growth in the money supply shifts aggregate demand . . . Long-run aggregate supply, LRAS1980 LRAS1990 LRAS2000 Price Level 1. In the long run, technological progress shifts long-run aggregate supply . . . P2000 4. . . . and ongoing inflation. P1990 Aggregate Demand, AD2000 P1980 AD1990 AD1980 0 Y1980 Y1990 Quantity of Output 3. . . . leading to growth in output . . . Y2000 Copyright © 2004 South-Western NOW---let’s put the graphs together: The Long-Run Equilibrium—LRAS, AS, AD Price Level LRAS--Long-run aggregate supply SRAS--Short-run aggregate supply A Equilibrium price Aggregate demand 0 Natural rate of output GDP--Quantity of Output Copyright © 2004 South-Western Long-Run Macroeconomic Equilibrium • Long-Run Macroeconomic Equilibrium • Recessionary Gap • Self-Correction • Inflationary Gap • Self-Correction • Output Gap: % diff between Ye from Yp 100 x (Ye-Yp)/Yp Copyright © 2004 South-Western