The Slope of the SAS Curve - The SAS curve is upward sloping because of - Auction markets - Prices are determined by demand and supply and supply curves are upward Sloping - Posted price markets - Also called quantity-adjusting markets, markets in which firms respond to Changes in demand by changing production instead of changing their prices. - Firms tend to increase their markup when demand increases Shifts in the SAS Curve - Shifts in the SAS are caused by changes in - Input prices - Productivity - Import prices - Sales and excise taxes The LAS Curve - The long-run aggregate supply curve shows the long-run relationship between output and The price levels. - The position of the LAS curve depends on potential output which is the amount of goods And services an economy can produce when both capital and labor are fully employed. - The LAS curve is vertical because potential output is unaffected by the price level - Increase in the LAS are caused by increases in - Capital - Resources - Growth-compatible institutions - Technology - Entrepreneurship Application: A recessionary gap in the AS/AS Model - A recessionary gap is the amount by which equilibrium output is below potential output Application: An inflationary gap in the AS/AS Model - An inflationary gap is the amount by which equilibrium output is above potential output Aggregate Demand Policy - A primary reason for government policy makers’ interest in the AS/AD model is that Monetary or fiscal policy shifts the AD curve. - Monetary policy involves the federal reserve bank changing the money supply and Interest rates - Fiscal policy is the deliberate change in either government spending or taxes to Stimulate or slow down the economy