KW_Macro_Ch_10_Sec_04_The_AS-AD_Model

KW_Macro_Ch_10_Sec_04_The_AS-AD_Model - chapter 10...

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>> 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.
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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 CHAPTER 10 SECTION 4: THE AS–AD MODEL 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.
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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-
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This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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KW_Macro_Ch_10_Sec_04_The_AS-AD_Model - chapter 10...

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