Long-run equilibrium
LRAS (longrun aggregate
supply) is at a
level of output
that
corresponds to
equilibrium in
labor market
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.
The short-run effects will be ...
As the equilibrium price level
and output decrease
This creates excess supply in the
labor market
The excess supply (high unemployment
and high real wages) forces wages down
and as wages decrease ...
AS shifts back to the right
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.
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.
The short-run effects will be ...
As the equilibrium price level
and output increase
This creates excess demand in the
labor market
The excess demand (low unemployment
and low real wages) forces wages up and as
wages increase ...
AS shifts back to the left
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.