Aggregate Supply

Aims and Objectives

Aim: Understand aggregate supply. Objectives: Define LRAS Explain how shifting LRAS can reduce inflation Analyse the effects of supply shocks on AD & AS.

Starter
Construct AS diagrams to show the following:
A rise in the wage rate A rise in capital investment A rise in the interest rate A decrease in the price of imported raw materials An increase in the latest technology A decrease in the amount of people willing to work A rise in welfare benefits

Aggregate Supply

Pair Teach Classical Macroeconomic Equilibrium

Aggregate Supply

Pair Teach Keynesian Macroeconomic Equilibrium

LRAS
Price Level LRAS

Real Output

Shifting LRAS
How can governments and policy makers help to shift the LRAS curve right and in doing so reduce inflation? Show this on a graph.

Shifting LRAS
How can governments and policy makers help to shift the LRAS curve right and in doing so reduce inflation? Supply side policies investment in education, training, human capital, grants for R&D

LRAS
Price Level LRAS LRAS1

Y1

Real Output

LRAS Combatting Inflation

Price Level
P1 P P2 AD 0
Y

LRAS

LRAS1

AD1

Y1

Real Output

LRAS Combatting Inflation

Demand increases AD to AD1. Inflation increases from P to P1.

Government combats inflation using supply side policies.

Shifting LRAS to LRAS1. Reducing inflation to P3.

LRAS & Inflation

Speed Dating LRAS Combatting Inflation

Supply Shocks

What happens to the macroeconomic equilibrium when this happens..

http://www.youtube.com/watch?v=RDOuwMj7Xzo

Supply Shock
Price Level
LRAS1 LRAS

P1 P AD 0
Y1 Y

Real Output

Government Policy
As government / policy makers how would you repair the economy in terms of AS & AD following an enormous supply shock such as a Tsunami?