THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 656

624

PA R T V I I Monetary Theory
The level of aggregate output produced at the natural rate of unemployment is
called the natural rate of output; it is where the economy settles in the long run
for any price level. Hence the long-run aggregate supply curve (LRAS) is vertical at
the natural rate of output, denoted by Yn, as drawn in Figure 24-2.

Short-Run
Aggregate
Supply Curve

Because wages and prices take time to adjust to economic conditions, a process
described by saying that wages and prices are sticky, the aggregate supply curve
(AS1) in the short run is upward-sloping, as depicted in Figure 24-3. To understand
why the short-run aggregate supply curve is upward-sloping, we have to look at
the factors that cause the quantity of output supplied to change. Because the goal
of business is to maximize profits, the quantity of output supplied is determined by
the profit made on each unit of output. If profit rises, more output will be produced,
and the quantity of output supplied will increase; if it falls, less output will be produced, and the quantity of aggregate output supplied will fall.

LRAS

Aggregate
Price Level, P

Yn

FIGURE 24-2

Aggregate Output, Y

Long-Run Aggregate Supply Curve

The amount of aggregate output supplied at any given price level goes to the natural rate level of
output in the long run, so that the long-run aggregate supply curve LRAS is a vertical line at Yn.

Aggregate Price
Level, P

AS2

B*

P2

P1

A*

AS1

B

A

Aggregate Output, Y

FIGURE 24-3

Aggregate Supply Curve in the Short Run

A rise in the costs of production shifts the short-run supply curve leftward from AS1 to AS2.