Short Run to Long Run

AP Macroeconomics

Where we came from…

Previously, we learned the supply and demand shocks are events that shift the short-run aggregate supply curve and the aggregate demand curve. Some shocks are positive, and others are negative.

We also learned that shifts in AD change the equilibrium along the SRAS curve.

Visual 3.11, Unit 3 Macroeconomics, National Council on Economic Education, http://apeconomics.ncee.net

Where are we going?

Until now, we’ve mostly discussed short-run changes in the macroeconomy. How do we move from the short run to the long run?

http://vokinburt.files.wordpress.com/2010/03/short-term-memory-loss1.jpg

From the Short Run to the Long Run

The economy is initially at full employment output (Y*)

There is an increase in aggregate demand from AD AD1

Output increases to Y1, and the price level increases to P1.

Visual 3.13, Unit 3 Macroeconomics, National Council on Economic Education, http://apeconomics.ncee.net

What does this mean?

As the price level increases, there’s a push for higher nominal wages to compensate for the higher price level.

The increase in nominal wages will shift the aggregate supply curve to the left (one of those determinants).

Down the road, the economy will return to the potential output level of Y*, but when it does it will be at a higher price level, P2.

This is referred to as adjustment over the long run

Reconciling with the PPC…

Increases in the factors that shift the LRAS curve will also shift the PPC

Factors that shift the LRAS to the right also shift the PPC outward or to the right

Factors that shift the LRAS to the left also shift the PPC inward or to the left.

Visual 3.14, Unit 3 Macroeconomics, National Council on Economic Education, http://apeconomics.ncee.net

Factors that shift the LRAS curve… Increases in technology Productivity of labor Increase in capital

stock

http://www.rootsweb.ancestry.com/~nycayuga/misc/images/NationalCarTruckCo.jpg

What you may want to do from here. Create a chart or Venn

Diagram to understand the determinants (factors that shift) of the following: supply and demand,

investment demand, short-run aggregate supply and aggregate demand, and long-run aggregate supply. This may help you to differentiate between those factors.

And now…

Some resources:

http://www.reffonomics.com/textbook2/macroeconomics2/keynesianthought/keynesiancross.swf

Works Cited

Economics of Seinfeld. Demand. http://yadayadayadaecon.com/clip/46/

Krugman, Paul, and Robin Wells. Krugman’s Economics for AP. New York: Worth Publishers.

Morton, John S. and Rae Jean B. Goodman. Advanced Placement Economics: Teacher Resource Manual. 3rd ed. New York: National Council on Economic Education, 2003. Print.

Reffonomics. www.reffonomics.com.