Why is the long-run aggregate supply curve vertical?
The long-run AS curve is vertical because short-run increases in aggregate output beyond potential GDP cause wages and input prices to rise. This causes the short-run AS curve to shift leftward. Aggregate output declines back to the level of potential GDP. 4. What are the short-run and long-run effects of demand changes? In the short run, increases in aggregate demand will increase both real GDP and the price level. In the long run, however, continued increases in aggregate demand will result in increasing rates of inflation and decreasing rates of output growth. 5. What are the effects of supply shocks? Supply (cost) shocks cause aggregate supply to decrease. The results are decreased aggregate output and higher inflation. This situation, known as stagflation, is difficult to counter with expansionary fiscal or monetary policy.
