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Shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy
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As the aggregate price level increases, the aggregate output increases
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Profit per unit of output = Price per unit of output - Production cost per unit of output
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As the price level increases, producers are collectively going to produce more goods and services
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This is all in the short-run
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The largest source of inflexible production cost is wages paid to workers (all forms of compensation)
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Typically, wages paid to workers are paid as nominal wages and not real wages
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We think in nominal terms, not in real terms
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Wages are not necessarily responsive to current economic conditions
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Wages, therefore, are considered sticky
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Sticky wages are nominal wages that are slow to fall in unemployment and slow to rise in labor shortages
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Changes in Commodity Prices
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Increase in the price of oil raises production costs and shifts AS to the left
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Decrease in the price of oil lowers production costs and shifts AS to the right
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Changes in Nominal Wages
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A fall in nominal wages shifts the AS to the right
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An increase in money paid to workers (cost of living increases) shifts the AS to the left
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Changes in Productivity
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Technology improvements will cause workers to increase productivity. AS shifts right
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New worker regulations has the opposite effect. AS shifts to the **left **
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Shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages were fully flexible
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Potential output
- level of real GDP the economy would produce if all prices, including nominal wages adjusted properly
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What would shift the LRAS?
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Increases in resources (land, labor, capital)
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Increases in the quality of resources (more educated workforce)
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Technological progress
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- If the aggregate output exceeded potential output, what would happen to the SRAS? What would happen to wages?
- If the aggregate output fell short of potential output, what would happen to the SRAS? What would happen to wages