Unit 5 Introduction to demand/pull and short run

April 7, 2016

Short run aggregate supply

• In macroeconomics this is the period in which wages remain fixed as price level increases or decreases.

Effects over short run

• In the short run price level changes allow for companies to exceed normal outputs and hire more workers b/c profits are increasing while wages remain constant.
• In the long run, wages will adjust to the price level and previous output levels will adjust accordingly.

Equilibrium in the extended model

• the extended model means the inclusion of both the short run and long run AS curve
• the long AS curve is represented

Demand pull inflation in the AS

• Prices increase based on increase in aggregate demand
• in the short run, demanded pull will drive up prices and increase production
• In the long run increase. in aggregate demand will eventually return to previous levels.

Cost push- arises from factors that will increase per unit costs such as increase in the price level of key resource
Dilemma for the government

• in an effort to fight cost push, the government could react in two different ways.
• Action such as spending by the govt. could begin an inflationary spiral.
• No action however could lead to recession by keeping production and employment levels declining.