Page 445 - Krugmans Economics for AP Text Book_Neat

figure 40.6 From the Short Run to the Long Run

Aggregate Aggregate
price LRAS SRAS 2 price LRAS SRAS 1
level level
SRAS 1 SRAS 2
E 2
A rise in
E 1 nominal E 1
P 1 wages P 1 A fall in
shifts SRAS nominal
leftward. wages
E 2
shifts SRAS
rightward.
AD AD

Y P Y 1 Real GDP Y 1 Y P Real GDP

In panel (a), the initial equilibrium is E 1 . At the aggregate price level, panel (b), the reverse happens: at the short-run equilibrium, E 1 , the
P 1 , the quantity of aggregate output supplied, Y 1 , exceeds potential quantity of aggregate output supplied is less than potential output.
output, Y P . Eventually, low unemployment will cause nominal wages High unemployment eventually leads to a fall in nominal wages over
to rise, leading to a leftward shift of the short-run aggregate supply time and a rightward shift of the short-run aggregate supply curve.
curve from SRAS 1 to SRAS 2 and a long-run equilibrium at E 2 . In The end result is long-run equilibrium at E 2 .

Module 40 AP Review

Solutions appear at the back of the book.
Check Your Understanding

1. How are long-run economic growth and short-run fluctuations 2. How are long-run economic growth and short-run fluctuations
during a business cycle represented using the production during a business cycle represented using the aggregate
possibilities curve model? demand-aggregate supply model?

Tackle the Test: Multiple-Choice Questions

1. Which of the following will shift the production possibilities c. movement from a point below the PPC to a point on
curve outward? the PPC.
I. an increase in the production of investment goods d. movement from a point on the PPC to a point below
II. an increase in the production of consumer goods the PPC.
III. technological progress e. movement from a point on the PPC to a point beyond
a. I only the PPC.
b. II only
3. The reduction in the value of an asset due to wear and tear is
c. III only
known as
d. I and III only
a. depreciation.
e. I, II, and III
b. negative investment.
2. In the production possibilities curve (PPC) model, long-run c. economic decline.
economic growth is shown by a(n) d. disinvestment.
a. outward shift of the PPC. e. net investment.
b. inward shift of the PPC.

module 40 Economic Growth in Macroeconomic Models 403