MAcro CHAPTER 3.4:

CHAPTER SUMMARY

SRAS is responsive to prices, because in the short-run, firms will respond to a change in price. If prices are really high, they might even be willing to pay such good wages that unemployment is below the natural rate, meaning we are, in a way, producing outside of our PPC.

However, in the long-run, there is a maximum amount of goods that an economy can produce if employing all of its resources under full employment of resources and the natural rate of unemployment. This would be equivalent to being "on the curve" with our PPC. This maximum amount of goods we can produce given the current economic conditions is known as the long-run aggregate supply (LRAS). It does not depend on the price level because a change in prices does not impact what an economy is capable of producing. That is why the graph of LRAS is vertical. The quantity is known as Y(F), with Y meaning Real GDP and F meaning "full employment of resources."

Any time an economy's production possibilities increase, the LRAS curve shifts to the right, and any time the production possibilities decrease, it shifts to the left. So, to understand what shifts this curve, think back to what would expand or shrink the PPC.

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