Unit 5

Chapter 28

RGDP

PL AS Aggragate Supply Curve – Shows for each possible price level, the quantity of G & S that all the nation’s businesses are willing to produce.

RGDP

PL AS

AD

6000

100E

80

110

120

90

64005600 68005200

AS intersects AD at equilibrium point E, therefore EGDP is at 6000 and PLE is at 100.

RGDP

PL AS0 AS1

AD

PGDP EGDP1

EGDP0

PLE0

PLE1

•How does it work?•As we get deeper into a recession workers’ need for pay will overwhelm their desire for higher wages so they will accept wage cuts. •We know that when wages decrease, costs decrease, therefore prices will decrease and producers will want to produce more at all level of GDP. This shifts AS out.

•When EGDP is less than PGDP the self-correcting mechanism will shift AS out, so that AS intersects with AD at PGDP.

PL

AD

AS

RGDPPGDP/EGDP

PLE

•We are at full employment when the AS curve intersects with the AD curve at the point where EGDP is equal to PGDP.