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Long-run equilibrium

Long-run equilibrium

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Long-run equilibrium

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  1. Long-run equilibrium LRAS (long-run aggregate supply) is at a level of output that corresponds to equilibrium in labor market LRAS P AS AD Y

  2. The preceding economy • Starts from a full employment equilibrium.(equilibrium in the labor market) • This means that AD and AS intersect LRAS and that the economy is operating at its potential level of RGDP (Real GDP). • Imagine now that the something happens to decrease AD.

  3. The short-run effects will be ... LRAS P AS To lower both P and Y AD AD" Y

  4. As the equilibrium price level and output decrease real wages rise and the quantity of labor demanded decreases real wages LS LD quantity labor demanded and supplied

  5. This creates excess supply in the labor market The excess supply (high unemployment and high real wages) forces wages down and as wages decrease ...

  6. AS shifts back to the right LRAS P AS AS" AD AD" Y

  7. In the long-run (Where labor markets have time to fully adjust to changes that have taken place in the goods market) the economy returns to its potential level of RGDP.

  8. Now take the opposite case: • Start again from a full employment equilibrium. • This means that the economy is operating at its potential level of RGDP. • Imagine now that the something happens that causes AD to increase.

  9. The short-run effects will be ... LRAS P AS To raise both P and Y AD" AD Y

  10. As the equilibrium price level and output increase real wages fall and the quantity of labor demanded increase real wages LS LD quantity labor demanded and supplied

  11. This creates excess demand in the labor market The excess demand (low unemployment and low real wages) forces wages up and as wages increase ...

  12. AS shifts back to the left LRAS AS" P AS AD" AD Y

  13. In the long-run (Where labor markets have time to fully adjust to changes that have taken place in the goods market) the economy returns to its potential level of RGDP.