Long Run Aggregate Supply curve

Question: Discuss about the Long Run Aggregate Supply curve. Answer: Introduction The discussion will primarily focus on long term macroeconomic equilibrium since it permits economist to perceive the macro-economy upon complete adjustment of market is realized. This equilibrium will be helpful in explaining why a stable economic equilibrium needs the operation of the economy at the output level whereby the long-term aggregate supply curve, aggregate demand curve, and short-term aggregate supply curve all are intersecting. An equilibrium is stable only whenever the economy is troubled upon which it relies and subsequently resumes to the initial location that is such commotion in equilibrium becomes self-modifying for the initial equilibrium to be reinstated. As explicated above, the natural level of employment takes places at a point in which real wage adjust to make the amount of labor demanded matches that of labor supplied. Where the economy hits its full employment level, it accomplishes its possible output level. Thus, the real GDP ultimately moves to possible since wages as well as prices assume flexibilities. Long Run Aggregate Supply curve (LRASC) The LRASC associates the output level generated by firms to the level of price in the long run. As indicated in the figure 1 (b) below (natural employment and LRAS, the curve is a perpendicular line at the possible output level of the economy. A solitary wage exist whereby employment hits the full level. In figure 1 (a), solely a real wage of e produces natural employment Le. The economy might, nevertheless, accomplish such a real wage with the infinitely huge set of nominal wage as well as price-level combinations (Dietl et al., 2012). Supposing, for instance, that equilibrium real wage is 1.50, this might be achieved with a nominal wage level of 1.50 along with price level of 1. The figure below thus indicates that where the economy hits its natural employment level in panel (a) where demand intersects supply curve for labor, it accomplishes the possible output, as indicate in board (b) by the perpendicular LRASC at Yp. In the long, therefore, the natural employment level alongside potential output of the economy at any level of price. This deduction provide economists the LRASC. LRASC with a single output level remains a perpendicular line at possible level pf output, Yp. Equilibrium Levels of Output and Price in the Long Run The equilibrium price level and real GDP in long term are determined by the intersection point of the long term ADC and LRASC. Figure 2 below portrays an economy in the long-run equilibrium. The real GDP becomes $12,000.0 billion yearly whereas the level of price is 1.140 given AD1 and LRASC (Khoo et al., 2014). Where AD rises to AD2, the long term equilibrium shall reestablish at real GDP of $12,000.0 billion yearly, however, a surged level of price of 1.180 is recorded. In case AD declines to AD3, the long term equilibrium shall remain unchanged at real GDP of $12,000.0 billion per annum, however, at declined level of price of 1.1. The above figure portrays AD-AS model with the node of the long term AS curve, the long term AD curve and short-term AS curve are all intersecting to give the level of equilibrium price alongside equilibrium output level. Aggregate demand curve remains the main root of shifts in economy since it is the one affected by consumers for foreign and local, and the government spending (Krugman, 2015). Generally, any policy of expansionary nature will shift the AD curve outwards whereas any policy of contractionary magnitude will shift the AD curve inwards. In long term, because the long-run AS remains constant by the factor inputs, short-run AS will shift inwards thus solely change effect in AD is an alteration in price level as shown below. An expansionary policy can be used to explain the reason behind this intersection of long-run AS, long-run AD and short-run AS. The point at which the short-tern AS along with short-run AD meets give is a short-term equilibrium whereas where the long-term AS along with long-run AD meets describes long-term equilibrium (Solow, 2012). Hence, an analysis begins with a long-run equilibrium. Now assume we have a stable economy and that Fed follows a policy of expansionary monetary nature. In this scenario, AD arc will shift outwards to AD2 from AD1. The intersecting point of long-run AS1 and AD2 has then lifted to higher zone to point B from A. At point B, level of price as well as output have amplified hence the newfangled short-term equilibrium. However, in a stable economy operating at full potential, as one moves to long-term, the projected level of price aligns with real level of price as employees, producers as well as firms fine-tune their expectation. Whenever the above happens, the short-term AS arc will shift lengthways the AD curvature till the long-term AS curvature, short-term AS curvature and AD curvature all interconnect as pointed out by C. This is newfangled equilibrium whereby the short-run AS2 equals the long-term AS curve and AD2 (Pesaran, 2014). Therefore, expansionary policy causes the level of output along with price to rise in short-term, however, solely level of price will rise in the long run (Tobin Buiter, 2013). Therefore, at a stable economy, any disturbance is restored in the long run as shown above. References Bryant, F. B., Veroff, J. (2011). Savoring: A new model of positive experience. Lawrence Erlbaum Associates Publishers. Dietl, T., Ohno, H., Matsukura, F., Cibert, J., Ferrand, D. (2012). 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