Macroeconomics - model SARS-LRAS

Résumé du document

Macro-economics is the part of economics studying regional economy as a whole. By doing so, it uses 'aggregate indicators' such as GDP, unemployment and so on. 'Aggregate supply' is one of these aggregate indicators and it represents the whole supply of an economy, assuming that there is only one good in the economy. Aggregate supply can be calculated in two forms, SRAS (standing for short run aggregate supply) or LRAS (standing for Long Run Aggregate Supply). The relation between these two concepts and GDP gives information on economy by the means of output gaps, which describe the difference between potential and the real GDP. What is the difference between LRAS and SRAS and how can policy makers respond to different output gaps?

Extraits

[...] The short run aggregate supply curve is defined as the total amount that will be produced and offered for sale at each price level on the assumption that all input price are fixed[1]. For instance labour, land and capital will always have the same cost, whatever the quantity produced. No economies of scale are possible in this model. In this system unit cost and outputs tend to be negatively related, indeed if the economy wants to sell more output it will have to hire less qualified workers and less productive machines. [...]

[...] The more they produce the less the profit will be. If there is a increase in productivity (e.g.:new technologies) or a decrease in inputs price( for instance: a decrease in oil price) the Short Run Aggregate supply curve will shift to the right. Whereas if there is a decrease in productivity or an increase in inputs prices the SRAS curve will shift to the left. Firms are divided into price takers and price setters. The price takers cannot influence the market and thus have to sell their products at the market price, they will only produce more output if the prices rise. [...]

[...] Finally the automatic stabiliser inherent to such a model question the efficiency of policy makers' measures, sometimes inappropriate or useless contrary to the market stabiliser Almighty in theory, but giving results in the long term. [...]

[...] If the policy makers want to address a recessionary gap, they will try to shift the AD curve to the right, in order to do it they will increase government spending ( part of the Aggregate Demand) and cut taxes, theses measures will increase GDP that will meet potential GDP. However this kind of policy leads to an increase in Price Level, and furthermore, the state cannot afford this policy for a long time as its deficit and debt are likely to rise. Another way of reducing this gap is to cut interest rate(monetary policy) in order to stimulate spending. [...]

[...] Furthermore, these measures are lagged three times ( due to information, decision, and execution times), and could be inappropriate by the time of their implementations. That is why some argue that they could do more harm than good to the economy and thus, chose to let the automatic stabilisers operate. SRAS and LRAS curves are two tools very useful for the government to think about their economies. The Keynesian model that linked them to price and GDP also give in-formations about unemployment. [...]