Module 18-19

Short-run Aggregate Supply Curve

• Upward sloping because nominal wages are sticky.
  • Thus, a higher aggregate price level leads to higher profits and increased aggregate output in the short run.
• Nominal wage
  • The dollar amount of the wage paid.
• Sticky wages
  • Nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages.

Wages 

Shifters of Aggregate Supply

• P - Productivity
• E - Inflation expectations
  • Lower -> Right
  • Higher -> Left
• A - Action by the government related to:
  • Business taxes
    • Increased -> Left
    • Decreased -> Right
  • Government subsidies
    
    • Increased -> Right
    • Decreased -> Left
• R - Resource costs
  
  • Wages
  • Input Costs
    
    • Commodities

Positive supply shock

Good thing!

• Decreases the price level.
• Reduces unemployment.

Negative supply shock

Two problems:

• Raises the price level (inflation)
• Reduces output (increases unemployment)

Known as stagflation.

Long run aggregate supply

Vertical because in the long run, wages are flexible.