Cobbe ECO2013 F03 Chapter 8Page 1 of 8<When you have completed your study of this chapter, you will be able toC H A P T E R C H E C K L I S TSketch the aggregate supply-aggregate demand (AS-AD) model and explain how real GDP and unemployment fluctuate in a business cycle.1Explain the forces that determine potential GDP and the functional distribution of income between labor and other factors of production.Explain what creates unemployment when the economy is at full employment and describe the influences on the natural unemployment rate.23Macroeconomists divide the variables that describe macroeconomic performance into two lists:•Realvariables•NominalvariablesWhen the economy is operating at full employment, the forces that determine the real variables are independentof those that determine the nominal variables.Away from full employment, real and monetary forces interact to bring economic fluctuations.UNDERSTANDING MACROECONOMIC PERFORMANCE8.1 THE AS-ADMODELThe forces that determine potential GDP provide the anchor around which real GDP fluctuates in a business cycle.The AS-ADmodel explains the fluctuations around potential GDP. This is a very broad, metaphor-like, model, that gives us a story with which to understand the macroeconomy’s behavior. The AS-ADmodel has three components:•Aggregate supply•Aggregate demand•Macroeconomic equilibrium8.1 THE AS-ADMODEL<Aggregate SupplyPotential GDPPotential GDP is the level of real GDP that the economy would produce if it were at full employment.8.1 THE AS-ADMODELAggregate supplyThe relationship between the quantity of real GDP supplied and the price level when all other influences on production plans remain the same.Other things remaining the same, the higher the price level, the greater is the quantity of real GDP supplied, and the lower the price level, the smaller is the quantity of real GDP supplied.
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