- This is the period in which wages and input prices remain fixed as price level decrease or increases.
LRAS
- This is the period of time in which wages have become fully responsive to changes in prices level.
Effects Over the Short Run
- In the short run, price level changes to allow for companies to exceed Normal Outputs and hire more workers.
- Prices are increasing while wages remain constant
- In long run, wages will adjust to the price level and previous output levels will adjust accordingly
Equilibrium in the Extended Model
- The extended model means the inclusion of both the short run and the AS curves.
- The Long AS curve is represented with a vertical line at full employment level of real GDP.
Demand Pull Inflation in the AS Model
- Demand Pull: Prices increase based on increase in Aggregate Demand.
- In the short urn, demand pull will drive up prices and increase production.
- In the long run, increase in aggregate demand will eventually return to previous levels.
Cost Push and Extended Models
Cost-push arises from factors that will increase per unit costs such as increase in the price of a key resources.
Dilemma for the Government
- In an effort to fight cost-push, the government can react in two different ways;
- Actions such as spending by the government could begin an inflationary spiral.
- No actions however could lead to recession.
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