Revisiting AD and AS

Revisiting AD/AS 

Short run aggregate supply 

• Time is too short for wages to adjust to the price level 
• Workers may not be aware of changes in their real wages due to inflation and have adjusted their labor supply decisions and wage demands accordingly 
• Fixed contract, no pay increase

Ranges

• Horizontal/Keynesian
• Intermediate
• Vertical/classical 

Wages

• Nominal wage
• Amount of money received per hour per day or per year
• Sticky wages
• Where the nominal wage level is set according to an initial price level, and it does not vary

Levels

Keynesian

• Price level is fixed
• Wage level is fixed
• unemployment level is flexible
• (Output depends on changes in employment)

Intermediate

• Price level is flexible
• Wage level is fixed
• Employment level is flexible
• (Output depends upon changes in price level and employment) 

Classical

• Price level is flexible
• Wage level is foxed
• Employment level is fixed
• (Output depends on changes in proce level) 

Long run aggregate supply

• Flexible wage and price level 
• They offset each other
• Shifts are connected to the PPC graph
• Time is long enough for wages to adjust to the price level
• Growth in some format, technological change, capital stock gains (shifts) 

Demand pull inflation

• Pulling something towards you
• AD will increase

Cost push inflation

• Pushing something away
• Decrease production 

Recession

• Not going to be spending
• AD is decreasing 

Economic growth

• Prices are going to be going up
• AD is decreasing