Exercises: Short-Run and Long-Run Aggregate Supply

For each event, state whether it shifts SRAS to the right, shifts SRAS to the left, or only moves the economy along a given SRAS curve. (a) The price of oil falls. (b) Nominal wages rise across the economy. (c) Worker productivity improves. (d) The price level rises.

Describe the shape of the long-run aggregate supply (LRAS) curve and say where it is located on the horizontal axis. Explain why it has that shape.

In two or three sentences, explain why the short-run aggregate supply (SRAS) curve slopes upward. Mention sticky wages or other sticky input prices in your answer.

A hurricane hits the Gulf Coast and damages oil refineries, causing the price of energy inputs to rise across the country. Describe the effect on the SRAS curve and the LRAS curve. Then describe what happens to the price level and real GDP in the short run, and name the term economists use for this combination of outcomes.

For each event, state which curve or curves shift (SRAS, LRAS, or both), and in which direction. (a) A wave of immigration increases the size of the labor force. (b) The economy adopts a new technology that raises productivity permanently. (c) Nominal wages across the economy fall by 3% while the quantity and quality of resources stay the same.

A union negotiates a contract that raises nominal wages by 5% for the next three years. Firms and workers expected the price level to rise by 2%, and it actually rises by 2%. Explain what happens to real wages, firms' costs, and the SRAS curve. Then explain whether the LRAS curve is affected.

Consider two policies. Policy A is a tax credit for research and development that increases productivity. Policy B is a large increase in the minimum wage that raises firms' labor costs. For each policy, explain the effect on SRAS and on LRAS, and predict the short-run effect on the price level, real GDP, and unemployment. Then explain which policy, if either, can increase potential output in the long run, and why.

Evaluate this statement: "Because the long-run aggregate supply curve is vertical, a permanent increase in aggregate demand has no effect on real GDP, so policymakers should never worry about the short run." Explain what happens to real GDP and the price level in the short run and the long run after an increase in AD. Then explain what kinds of changes would shift LRAS to the right, and why the statement overlooks the costs of short-run fluctuations.