Explain the relationship of the long-term sum supply curve, the short-term sum supply curve and the aggregative demand curve in finding a long-term and short-term macroeconomic equilibrium. ( 10 Markss )
The curves represent two aggregate short tally aggregate supply ( SRAS ) and long tally sum supply ( LRAS ) . Short tally aggregate supply ( SRAS ) is monetary value degree of entire end product in a clip period will stay the same. The SRAS will response to manufacturers as high demands in the economic system that makes the monetary value degree to increase and leads to increase in net income and existent end product, therefore doing an economic growth..
Aggregate Demand is a curve that shows the entire demand for goods and services in the economic system at a monetary value degree. The curve is slop downward since it has an opposite between the sum end product and the pricing degree.
In the long tally equilibrium ( LRE ) , the economic system monetary values of all factors of production like pay rates and other factor monetary values to hold adjusted to any perturbations so that the measures demanded and supplied are equal in all markets. For LRE to switch is when there is an addition in measure and productiveness of factors of production or an progress in engineering cause an addition in the productive potency of the economic system. But besides the LRE is able to accomplish full employment since the LRE intersect with the GDP and monetary value of the aggregative demand. At this point the LRE lies on the long tally aggregate supply curve and in a consequence an addition in aggregative end product.
Short tally equilibrium monetary values of goods and services alteration in responds to alterations in demand and supply but the factors of production such as pay rates and the monetary values of natural stuffs do non alter. This is due to rewards rate in labour alteration easy than monetary value degrees and the monetary value of natural stuffs keeps has a little impact like oil since manufacturers will maintain the monetary value steady but at the same clip or period it will alter in a immense sum difference. At the monetary value degree equilibrium, the aggregative demand for goods and services is equal to the aggregative supply of output. & A ; Acirc ; The end product and the general monetary value degree in the economic system will be given to set towards this equilibrium place. But no affair the monetary value degree addition or decreases the economic system will be taken to a equilibrium degree of end product. For illustration if the aggregative supply is greater than current demand. This will take to a supply of stocks and this will do manufacturers either to cut monetary values so they can increase in demand or to cut down end product so there is less supply stock in the manufacturers. Either manner there is a inclination for end product to travel closer to the current degree of demand.
From short tally aggregate supply to the long tally aggregate supply switching towards the right side will do an sum end product to diminish. Therefore doing the AS curve to switch right but is all due to an accommodation in the economic system and this will hold an autumn in rewards as it shift right.
The relation between the two equilibrium is that they both go the other manner unit of ammunition, if there is a recessive spread, the sum end product is below the possible end product it suppose to be and the other is the inflationary spread which the sum end product is higher than the possible end product. With these it can do rise in rewards with lowing monetary value degree and sum end product and cut downing unemployment rate for the inflationary spread.
What happens if the economic system is at its long-term equilibrium and aggregative demand additions? ( 5 Markss )
When the economic system is at its long tally equilibrium, it is runing near full employment. This will do the economic system to increase in aggregative demand of goods and services therefore switching the equilibrium to another point, at the point of clip houses can & amp ; acirc ; ˆ™t increase their end product since they have reach its full capacity and that they have to purchase other natural resources from other state or acquire more labor which will besides increase cost. The consequence will therefore addition in demand doesn & A ; acirc ; ˆ™t increase a batch in the end product ( economic growing ) but instead consequence in the monetary value degree of available merchandise traveling up, so when increasing aggregative demand the economic system will endure high rising prices and a small spot of economic growing.
If the long tally aggregate supply displacements right, that means the authorities has implement expansionary pecuniary policy or financial policy which allows the aggregative demand curve to switch but with these policies it can take a long clip for it to to the full take consequence. Once the policy is to the full consequence, the economic system will began to alter as houses will be more efficient and more comparative. It will besides diminish rising prices rate of monetary value degree which the economic system will be able green goods and less force per unit area to force up monetary values. This will do an addition in the end product that will increase economic growing.
Long tally equilibrium can do the aggregative demand to increase but the economic will hold a slow growing and high rising prices.
A displacement in aggregative supply can alter the sum end product and monetary value degree in the economic system.