AD and Vertical LRAS

January 19th, 2008 | economics -

Readers Question 2. Imports. What if the extra J of 30 (that is supposed to boost AD to the right) is met completely by imports, when the AS is vertical (LRAS). you cant produce any more, so imagine the extra demand is supplied by importers. equilibrium cant go beyond LRAS, and prices shouldnt go up, because demand has been met externally, not domestically. AD hasnt moved, it cant move! Yet more is going round the circular flow than before!

There is a difference between a nominal increase in AD and a real increase in AD.

If LRAS is inelastic, an increase in AD (shift to the right) will cause prices to rise, but Real GDP will remain the same.

Therefore, there has been an increase in nominal AD and nominal GDP but, real GDP stays the same.

(Real GDP = Nominal GDP – inflation)