macroeconomics-lesson-5 compress.pdf - U N IT 3 M acr...

Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.
479
Introduction and Description
In this lesson, the focus is on the short-run equilib-
rium between aggregate supply and demand, on
the changes in output and price level if aggregate
supply or aggregate demand changes, and on the
students’ability to explain correctly why the curve
shifted in a specific direction. The relationship
between the simple Keynesian model and the aggre-
gate supply-aggregate demand model is explored.
Activity 25 provides the students with practice at
manipulating the aggregate demand and aggregate
supply model and interpreting the effects on the
price level and real GDP. Students who perform
well on this activity have an excellent foundation
for the rest of the course. Activity 26 relates the Key-
nesian simple model and the AD and AS model.
1. Project Visual 3.11 and focus on the top graph.
Short-run macroeconomic equilibrium occurs
when real GDP demanded equals real GDP sup-
plied. This is Point A in the graph, or the level of
output Y.
If the price level (P
1
) is above the equilibrium,
then the aggregate supply (Y
2
) is greater than the
aggregate demand (Y
1
). Firms experience an
accumulation of inventory; they cut production
and employment; output decreases toward the
equilibrium level. Have the students tell a compa-
rable story if the price level is below equilibrium.
2. Explain that the long-run macroeconomic equi-
librium occurs at point B in the lower graph of
Visual 3.11.
Objectives
1. Explain the macroeconomic equilibrium.
2. Explain what happens to the equilibrium price
level and quantity with a change in aggregate
demand.
3. Explain what happens to the equilibrium price
level and quantity with a change in aggregate
supply.
4. Explain what happens to the equilibrium price
level and quantity with a change in aggregate
demand and aggregate supply.
5. Explain the relationship between the simple
Keynesian model and the AD and AS model.
6. Distinguish among equilibrium below, above
and at full employment.
Time Required
Two class periods or 90 minutes
Materials
1. Activities 25 and 26
2. Visuals 3.11 and 3.12
Procedure
1. Project Visual 3.11 and focus on the top graph.
Short-run macroeconomic equilibrium occurs
when real GDP demanded equals real GDP sup-
plied. This is Point A in the graph, or the level of
output Y.
If the price level (P
1
) is above the equilibrium,
then the aggregate supply (Y
2
) is greater than the
aggregate demand (Y
1
). Firms experience an
accumulation of inventory; they cut production
and employment; output decreases toward the
equilibrium level. Have the students tell a compa-
rable story if the price level is below equilibrium.
2. Explain that the long-run macroeconomic equi-
librium occurs at point B in the lower graph of
Visual 3.11.