Worth: Mankiw Economics 5e HAPTER 9 Introduction to Economic Fluctuations 247 The Short Run: The Horizontal Aggregate Supply Curve The classical model and the vertical aggregate supply curve apply only in the long run. In the short run, some prices are sticky and, therefore, do not adjust to changes in demand. Because of this price stickiness, the short-run aggregate sup ply curve is not vertical As an extreme example, suppose that all firms have issued price catalogs and that it is costly for them to issue new ones. Thus, all prices are stuck at predeter mined levels. At these prices, firms are willing to sell as much as their customers are willing to buy, and they hire just enough labor to produce the amount de- manded. Because the price level is fixed, we represent this situation in Figure 9-6 vith a horizontal aggregate supply curve fiqure 9-6 Price level, P The Short-Run Aggregate Supply Curve In this extreme example, all fixed in the short Therefore the shot Short-run aggregate supply, SRAS supply curve, SRAS, is horizontal The short-run equilibrium of the economy is the intersection of the aggregate demand curve and this horizontal short-run aggregate supply curve. In this case, changes in aggregate demand do affect the level of output. For example, if the Fed suddenly reduces the money supply, the aggregate demand curve shifts inward,as in Figure 9-7. The economy moves from the old intersection of aggregate de mand and aggregate supply, point A, to the new intersection, point B. The move- ment from point a to point B represents a decline in output at a fixed price level Thus, a fall in aggregate demand reduces output in the short run because prices do not adjust instantly. After the sudden fall in aggregate demand, firms are stuck with prices that are too high. With demand low and prices high, firms sell less of their product, so they reduce production and lay off workers. The econ- omy experiences a recession From the Short Run to the Long Run We can summarize our analysis so far as follows: Over long periods of time, prices are flexible, the aggregate supply curve is vertical, and changes in aggregate demand affect the price level but not output. Over short periods of time, prices are sticky, the aggregate supply curve flat, and changes in aggregate demand do affect the economy's output of goods and services. User JOENA: Job EFFo1425: 6264_ch09: Pg 247: 27139#/eps at 100*mg wed,Feb13,200210:084User JOEWA:Job EFF01425:6264_ch09:Pg 247:27139#/eps at 100% *27139* Wed, Feb 13, 2002 10:08 AM The Short Run: The Horizontal Aggregate Supply Curve The classical model and the vertical aggregate supply curve apply only in the long run. In the short run, some prices are sticky and, therefore, do not adjust to changes in demand. Because of this price stickiness, the short-run aggregate sup￾ply curve is not vertical. As an extreme example, suppose that all firms have issued price catalogs and that it is costly for them to issue new ones.Thus, all prices are stuck at predeter￾mined levels.At these prices, firms are willing to sell as much as their customers are willing to buy, and they hire just enough labor to produce the amount de￾manded. Because the price level is fixed, we represent this situation in Figure 9-6 with a horizontal aggregate supply curve. CHAPTER 9 Introduction to Economic Fluctuations | 247 figure 9-6 Price level, P Income, output, Y Short-run aggregate supply, SRAS The Short-Run Aggregate Supply Curve In this extreme example, all prices are fixed in the short run. Therefore, the short-run aggregate supply curve, SRAS, is horizontal. The short-run equilibrium of the economy is the intersection of the aggregate demand curve and this horizontal short-run aggregate supply curve. In this case, changes in aggregate demand do affect the level of output. For example, if the Fed suddenly reduces the money supply, the aggregate demand curve shifts inward, as in Figure 9-7. The economy moves from the old intersection of aggregate de￾mand and aggregate supply, point A, to the new intersection, point B.The move￾ment from point A to point B represents a decline in output at a fixed price level. Thus, a fall in aggregate demand reduces output in the short run because prices do not adjust instantly.After the sudden fall in aggregate demand, firms are stuck with prices that are too high.With demand low and prices high, firms sell less of their product, so they reduce production and lay off workers.The econ￾omy experiences a recession. From the Short Run to the Long Run We can summarize our analysis so far as follows: Over long periods of time, prices are flexible,the aggregate supply curve is vertical,and changes in aggregate demand affect the price level but not output. Over short periods of time, prices are sticky, the aggregate supply curve is flat, and changes in aggregate demand do affect the economy’s output of goods and services