Tuesday 23 February
In the Aggregate Demand/Aggregate Supply model of the macro economy, AD slopes down, LRAS is vertical, and SRAS slopes up. In one sentence each, give one reason why
The comments given are not "one sentence one reason," they give fairly complete explanations; you only had to give one reason for each of 1. and 3.
The AD/AS 'model' is comparable to a Demand and Supply model for a market for a single commodity, except that it is a bit closer to a metaphor because it is dealing with aggregates, i.e. total output and its price level. Therefore on the diagram we measure real GDP on the horizontal axis, and the price level of GDP [i.e. output price level] on the vertical axis, ceteris paribus -- i.e., everything except the real GDP of the US, and the price level of US GDP, held constant.
AD is Aggregate Demand, how much real GDP people want to buy at different price levels. AD sloping down means that, everything else constant, if the price level for US output goes down, the aggregate amount of real US GDP people want to buy increases.
There are three major reasons:
LRAS is Long Run Aggregate Supply, how much real GDP producers want to sell at different price levels, given enough time for input prices to adjust to the different output price level.
We just assume that, given population, capital stock, technology, and institutional arrangements, the economy has a given capacity to produce output, consistent with the NAIRU or natural rate of unemployment, and the producers in the economy will want to supply that quantity of real GDP once they have time to fully adjust to a new output price level, whatever that output price level.
SRAS is Short Run Aggregate Supply, i.e. how much real GDP producers want to sell at different output price levels, given that they have not yet had time to get out of long run contracts or other commitments, so that some input prices have not yet had time to adjust fully to the new level of output prices [implicitly, we assume that in the long run input prices and output prices will be in a relationship to each other such that at the NAIRU, the typical firm is making only normal rates of return, i.e. zero economic profit]. There are two main reasons SRAS slopes up: