3 good questions and answers: "Aggregate Supply - from Short Run to Long Run"

How is it possible to produce an aggregate output level this is higher than the potential output
  • it is only possible to produce an aggregate output level this is higher than the potential output because nominal wages have not fully adjusted upward.
  • until this upward adjustment in nominal wages occurs, producers are earning high profits and producing a high level of output
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What do we call the level of real GDP that the economy would produce if all prices, including nominal wages, were perfectly flexible?
The potential output YP
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What does a level of aggregate output lower than potential output mean? What does this mean for workers wages? What happens to the short run aggregate supply curve?
  • It means a high level of unemployment
  • because jobs are scarce and workers and abundant the nominal wage will fall over time
  • shifting the short run aggregate supply curve rightward
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