Worth: Mankiw Economics 5e 246 PART IV Business Cycle Theory: The Economy in the Short Run figure 9-4 The Long-Run Aggregate Supply Long-run aggregate supply, LRAS Curve In the lo output is determined by the amounts of capital and labor and by the available technology; it does not depend on the price level. the lot supply curve, LRAS, is vertical demand curve shifts downward, as in Figure 9-5. The economy moves from the ld intersection of aggregate supply and aggregate demand, point A, to the new intersection, point B The shift in aggregate demand affects only prices The vertical aggregate supply curve satisfies the classical dichotomy, because it implies that the level of output is independent of the money supply. This long un level of output, Y, is called the full-employment or natural level of output. It is the level of output at which the economy s resources are fully employed or, mor realistically, at which unemployment is at its natural rate. figure 9-5 Price level. p Shifts in Aggregate Demand in the Long Run A reduction in the money supply shifts the aggregate demand curve downward from AD, to AD The equilibrium for the 1. A fall in aggregate economy noves from point A to point B. Since the aggregate 2.. Jowers supply curve is vertical in the level in the aggregate demand affects the long run price level but not the level of 3. but eaves output the same Income, output, Y User JOENA: Job EFFo1425: 6264_ch09: Pg 246: 27138#/eps at 100*mlg wed,Feb13,200210:084User JOEWA:Job EFF01425:6264_ch09:Pg 246:27138#/eps at 100% *27138* Wed, Feb 13, 2002 10:08 AM demand curve shifts downward, as in Figure 9-5.The economy moves from the old intersection of aggregate supply and aggregate demand, point A, to the new intersection, point B.The shift in aggregate demand affects only prices. The vertical aggregate supply curve satisfies the classical dichotomy, because it implies that the level of output is independent of the money supply.This long￾run level of output, Y –, is called the full-employment or natural level of output. It is the level of output at which the economy’s resources are fully employed or, more realistically, at which unemployment is at its natural rate. 246 | PART IV Business Cycle Theory: The Economy in the Short Run figure 9-4 Price level, P Income, output, Y Long-run aggregate supply, LRAS Y The Long-Run Aggregate Supply Curve In the long run, the level of output is determined by the amounts of capital and labor and by the available technology; it does not depend on the price level. The long-run aggregate supply curve, LRAS, is vertical. figure 9-5 Price level, P Y Income, output, Y AD1 AD2 LRAS A B 1. A fall in aggregate demand . . . 3. . . . but leaves output the same. 2. . . . lowers the price level in the long run . . . Shifts in Aggregate Demand in the Long Run A reduction in the money supply shifts the aggregate demand curve downward from AD1 to AD2. The equilibrium for the economy moves from point A to point B. Since the aggregate supply curve is vertical in the long run, the reduction in aggregate demand affects the price level but not the level of output