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Long and Short Run Aggregate Supply Curves

Explain the differences between the long run and short run aggregate supply curves. Consider these differences and explain how an expansionary gap occurs.

Solution Preview

See the attached file.
The supply side of the aggregate market is captured by two separate curves - one for the long run and one for the short run. The exhibit to the right is waiting to display both curves. Before revealing the aggregate supply curves, first note that the price level is measured on the vertical axis and real production is measured on the horizontal axis. The price level is measured by the GDP price deflator and real production is measured by real GDP.

Long Run: The long run is characterized by flexible prices and equilibrium in production, financial, and resource markets. This means that resources, especially labor, have full employment. Flexible prices mean that full employment is achieved and maintained, regardless of the price level. As a result, the long-run aggregate supply curve is vertical at ...

Solution Summary

In about 520 words, this response discusses the topic of aggregate supply curves, detailing the factors which can shift these curves, the differences between the short and long run curves and a discussion of expansionary gaps. A pdf file is also attached and it includes diagrams to further explain this topic.