SRAS
Period when wages and other input prices remain fixed as price level increases or decreases
Effects over SR
Price level changes allow companies to exceed normal outputs and hire more workers because 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
The LRAS curve is represented with a vertical line at full employment level of real GDP
Demand pull inflation in AS model
Prices increase based on increase in AD
- In the short run, demand pull will drive up prices and increase production
- In long run increases in AD. Will eventually return to previous levels
Cost push inflation
Arises from factors that will increase per unit costs such as increase in the price of a key resource
Dilemma for the Gov't
In an effort to fight cost-push the gov't can react in two different ways:
- Action such as spending by the gov't could begin an inflationary spiral
- No action however could lead to recession by keeping production and employment levels declining
Misery Index
A combination of inflation and unemployment in any given year
- Single digit misery is good
Supply shocks
Rapid and significant increase in resource cost
Inflation
A general rise in prices
Deflation
General decline in prices
Disinflation
reduction in inflation from year to year (found in LRPC)
Stagflation
Unemployment and inflation rise/ increase at same time
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