110 ❯ Step 4. Review the Knowledge You Need to Score High
Macroeconomic Short Run
In the macroeconomic short run period of time, the prices of goods and services are
changing in their respective markets, but input prices have not yet adjusted to those prod
uct market changes. This lag between the increase in the output price and the increase in
input prices gives us a shape of the shortrun AS curve that is described in three stages.
Figure 9.3 illustrates the stages of shortrun AS.If the economy is in a recession with low production (GDPu), there are many unem
ployed resources. Increasing output from this low level puts little pressure on input costs
and subsequent minimal increase in the aggregate price level. The first stage of AS is drawn
as almost horizontal. The Keynesian school of economics believes that when aggregate
spending is extremely weak, the economy can be modeled in this way.
As real GDP increases in the second stage of AS and approaches full employment
(GDPf), available resources become more difficult to find, and so input costs begin to
rise. If the price level for output rises at a faster rate than the rising costs, producers have
a profit incentive to increase output. Most of the time the economy is operating in this
upwardsloping range of AS, and so you see shortrun AS (SRAS) commonly drawn with
a positive slope.
If the economy grows and approaches the nation’s productive capacity (GDPc), firms
cannot find unemployed inputs. Input costs and the price level rise much more sharply,
and so in this third stage of AS, the curve is almost vertical.Macroeconomic Long Run
The period of time known as the macroeconomic long run is long enough for input
prices to have fully adjusted to market forces. Now all product and input markets are in
equilibrium, and the economy is at full employment. In this longrun equilibrium, the
AS curve is vertical at GDPf. The Classical school of economics asserts that the economy
always gravitates toward full employment; so a cornerstone of classical macroeconomics is
a vertical AS curve. Figure 9.4 illustrates the longrun AS (LRAS) curve.
• When drawing the AD/AS graph for a free-response question, it is not acceptable to label
the vertical axis “P” or “$” and the horizontal axis “Q.” You want to be very careful to
use terms like “Aggregate price level” or “PL” on the vertical axis and “Real output” or
“Real GDP” on the horizontal axis to earn these graphing points.Short-Run ASReal GDPPrice
LevelGDPu GDPf GDPcStage (^1) Stage 2
Stage 3
Figure 9.3
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