KW_Macro_Ch_10_Sec_04_The_AS-AD_Model

KW_Macro_Ch_10_Sec_04_The_AS-AD_Model - chapter 10...

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
>> Aggregate Supply and Aggregate Demand Section 4: The AS–AD Model chapter 10 From 1929 to 1933, the U.S. economy moved down the short-run aggregate sup- ply curve as the aggregate price level fell. In contrast, from 1979 to 1980 the U.S. economy moved up the aggregate demand curve as the aggregate price level rose. In each case, the cause of the movement along the curve was a shift of the other curve. In 1929–1933, it was a leftward shift of the aggregate demand curve—a major fall in consumer spending. In 1979–1980, it was a leftward shift of the short-run aggregate supply curve—a dramatic fall in short-run aggregate supply caused by the oil price shock. So to understand the behavior of the economy, we must put the aggregate supply curve and the aggregate demand curve together. The result is the AS–AD model, the basic model we use to understand economic fluctuations. The AS–AD model uses the aggregate supply curve and the aggregate demand curve together to analyze economic fluctuations.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Short-Run Macroeconomic Equilibrium We’ll begin our analysis by focusing on the short run. Figure 10-10 shows the aggre- gate demand curve and the short-run aggregate supply curve on the same diagram. The point at which the AD and SRAS curves intersect, E SR , is the short-run macroeco- nomic equilibrium: the point at which the quantity of aggregate output supplied is equal to the quantity demanded by domestic households, businesses, the government, 2 C H A P T E R 1 0 S E C T I O N 4 : T H E A S – A D M O D E L Figure 10-10 Y E Real GDP P E Agg r egate p r ice level E SR SRAS AD Short-run macroeconomic equilibrium The AS-AD Model The AS–AD model combines the short-run aggregate supply curve and the aggregate demand curve. Their point of intersection, E SR , is the point of short-run macroeco- nomic equilibrium where the quantity of aggregate output demanded is equal to the quantity of aggregate output sup- plied. P E is the short-run equilibrium aggregate price level, and Y E is the short- run equilibrium level of aggregate output. The economy is in short-run macro- economic equilibrium when the quantity of aggregate output sup- plied is equal to the quantity demanded.
Image of page 2
and the rest of the world. The aggregate price level at E SR , P E , is the short-run equi- librium aggregate price level. The level of aggregate output at E SR , Y E , is the short- run equilibrium aggregate output. In the supply and demand model of Chapter 3 we saw that a shortage of any indi- vidual good causes its market price to rise but a surplus of the good causes its market price to fall. These forces ensure that the market reaches equilibrium. The same logic applies to short-run macroeconomic equilibrium. If the aggregate price level is above its equilibrium level, the quantity of aggregate output supplied exceeds the quantity demanded. This leads to a fall in the aggregate price level and pushes it toward its equilibrium level. If the aggregate price level is below its equilibrium level, the quan- tity of aggregate output supplied is less than the quantity demanded. This leads to a
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern