Unit 3.4 Long-run aggregate supply

long-run

a sufficient period of time for nominal wages and other input prices to change in response to a change in the price level; the long-run is not any fixed period of time. Instead, this refers to the time it takes for all prices to fully adjust

long-run aggregate supply (LRAS)

a curve that shows the relationship between price level and real GDP that would be supplied if all prices, including nominal wages, were fully flexible; price can change along the LRAS, but output cannot because that output reflects the full employment output.

full employment output

(also called potential output) the amount of real GDP that an economy would produce if it is using all of its factors of production efficiently

The classical assumption

the belief that it is possible for all prices to fully adjust; prior to the Great Depression, economists generally assumed that prices weren’t stuck, which meant that the “old school” way of thinking about aggregate supply was that it was a vertical line like the LRAS.