This wk: Learn about the long-run aggregate supply curve and how it helps us understand business fluctuations.

Next wk: Sticky wages! Why are wages so slow to change?

The long-run aggregate supply curve is actually pretty simple: it’s a vertical line showing an economy’s potential growth rates. Combining the long-run aggregate supply curve with the aggregate demand curve can help us understand business fluctuations.

For example, while the U.S. economy grows at about 3% per year on average, it does tend to fluctuate quite a bit. What causes these fluctuations? One cause is “real shocks” that affect the fundamental factors of production. Droughts, changes to the oil supply, hurricanes, wars, technological changes, etc. can all have big and potentially far-reaching consequences.

Next week, we’ll dig into why wages are considered “sticky,” or slow to change.

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