3.6-3.7 Long-Run Self-Adjustments

Long Run

• over a long enough period of time, the econ. will self-adjust and go back to long-run equilibrium without government interaction

• basically our economy follows this trend-line over time, so these fluctuations are temporary

Shocks

• are unanticipated changes in economic conditions

1. Demand ___ shifts AD curve

2. Supply ___ shifts SRAS curve

3. Positive ___ move curve →

4. Negatiev ___ move curve ←

Long-Run vs Short-run wages

• in short run, wages are STICKY, so they are slow to adjust to changes in price level

• in long run, wages CAN CHANGE when reacting to economic fluctuations bc “fixed” element doesn’t to exist

• this ability to change wages, as well as a “self-correcting economy” will lead to the long-run SELF-ADJUSTMENT

SRAS bc suppliers react to econ first

In a Long-Run Self-Adjustment, what will definitely shift?

Long-Run Self-Adjustment

does NOT change output, ONLY PRICE LEVEL changes

• our economy will trend back to Long-Run Equilibrium (aka natural output, full-employment, full-capacity, potential output, natural rate of unemployment)

LRAS Shifters

1. investment spending on CAPITAL

2. new tech

3. more population

4. anything that allows us to produce more long-term

if it isnt smt that inc. production long term, LRAS doesnt move

Long Run Self Adjustment

when AD increases

1. AD inc.

2. output increases in short run

3. SRAS shifts left bc prices increase

4. output returns to natural rate (LRAS)

Long Run Self Adjustment

when AD decreases

1. AD dec.

2. output falls in short run

3. SRAS shifts right bc prices fall

4. output returns to natural rate (LRAS)