Shapes of Aggregate Supply AD/AS Model Continued

Aggregate Supply Curve Aggregate-supply curve (AS)- how supply of goods & services for the entire economy changes with inflation quantity of goods & services all firms produce at each price level AS1 Price Level Real GDP AD1 AD2 Gov’t ↓ Income Taxes => Consumer income ↑ C ↑ => AD ↑ => R-GDP ↑ -------------------- ------------------ P2 Y2 E2 --------------- P1 Y1 E1 AD = C + I + G + NX

Different Shapes of AS Curves AS Curves can have 3 different shapes The Shape will depend on how prices/wages adjust to inflation Upward Sloping Horizontal Vertical Px Level Px Level Px Level AS AS AS Real GDP Real GDP Real GDP

AS/AD Model AS/AD Model has 2 different AS curves Short run curve (SRAS) is upward sloping Long Run curve (LRAS) is vertical

Worksheet

without inflation changing Can increase Supply With some inflation Real GDP can Worksheet Review: Px Level AS AS Px Level Px Level AS Real GDP Real GDP Real GDP Cannot increase Supply. Only Inflation changes => not output Real GDP cannot change Can increase supply without inflation changing Real GDP can