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S E C T I O N 8 A G G R E G A T E D E M A N D A N D A G G R E G A T E S U P P L Y
29
27 Aggregate Demand
28 Aggregate Supply
29 The AD-AS Model
The AS–AD Model • The AS-AD model uses the AS curve and the AD
curve together to analyze economic fluctuations.
Slide 2
Short-Run Macroeconomic Equilibrium • The economy is in short-run macroeconomic
equilibrium when the quantity of aggregate output supplied is equal to the quantity demanded.
• The short-run equilibrium aggregate price level
is the aggregate price level in the short-run macroeconomic equilibrium.
• Short-run equilibrium aggregate output is the
quantity of aggregate output produced in the short-run macroeconomic equilibrium.
Slide 3
The AS–AD Model
Slide 4
Y E
P E E SR
S R AS
AD
Real GDP
Short-run macroeconomic
equilibrium
Aggregate price level
Macroeconomic Shocks
• If a demand or supply shock hits the economy, AD or AS shifts and moves the economy to a new equilibrium.
Slide 5
Demand Shocks
Slide 6
Y 2
2 P 2
AD 2
A negative demand shock...
Y 1
E 1
E
S R AS
AD 1
Y 1
2
E 1
S R AS
AD 1
P 1
P 1
Real GDP
Aggregate price level
Real GDP
Aggregate price level
...leads to a higher aggregate price level and higher
aggregate output.
(a) A Negative Demand Shock (b) A Positive Demand Shock
E P 2
Y 2
AD 2
A positive demand shock...
...leads to a lower aggregate price level and lower aggregate
output.
Supply Shocks
Slide 7
P 1
AD
Y 1
E 1
Real GDP
Aggregate price level
(a) A Negative Supply Shock
SRAS 1 SRAS
Y 2
2 E
P 2
2
Y 1
1
AD
E 2
E
SRAS
P 1
Real GDP
Aggregate price level
(b) A Positive Supply Shock
P 2
Y 2
SRAS 2 1
A negative supply shock...
…leads to a lower aggregate output
and a higher aggregate price
level.
...leads to a higher aggregate output
and lower aggregate price
level.
A positive supply shock...
Long-Run Macroeconomic Equilibrium
• The economy is in long-run macroeconomic
equilibrium when the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve.
Slide 8
Long-Run Macroeconomic Equilibrium
Slide 9
Y P
P E
S R AS
L R AS
AD
E LR
Real GDP
Aggregate price level
Long-run macroeconomic equilibrium
Potential output
SR vs LR Effects of a Negative Demand Shock
Slide 10
Y 1
P E 1
2
S R AS 1 L R AS
AD 1
Real GDP
Aggregate price level
Potential output
E 3 P 3
SRAS 2
3. …until an eventual fall in nominal wages
in the long run increases short-run aggregate
supply and moves the economy back to potential output.
2
2. …reduces the aggregate price level and aggregate
output and leads to higher unemployment in the short run…
AD 2
Recessionary gap
Y 2
E
1. An initial negative
demand shock…
1
P
SR vs LR Effects of a Positive Demand Shock
Slide 11
Y 1
P 3
E 3
E1
P 1
P
S R AS 1
L R AS
AD
Real GDP Potential
output
AD 2
1.An initial positive demand shock…
Inflationary gap
Y 2
2 E 2 2. …increases the
aggregate price level and aggregate output
and reduces unemployment
in the short run… 1
Aggregate price level
Long-Run Macroeconomic Equilibrium • The economy is self-correcting when shocks to AD affect aggregate output in the short run, but not the long run.
• Stabilization policy is the use of government policy to reduce the severity of recessions and rein in excessively strong expansions.
• If policy makers react quickly to a fall in aggregate demand, they can use monetary or fiscal policy to shift the AD curve back to the right.
• Unlike demand shocks, there are no government policies that can easily react to shocks an AS shock.
Slide 12