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Aggregate Supply & Aggregate Demand PowerPoint PPT Presentation


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Aggregate Supply & Aggregate Demand. Chapter 10-4 The Model. The AS–AD Model. The AS-AD model uses the aggregate supply curve and the aggregate demand curve together to analyze economic fluctuations. The AS–AD Model. Short-Run Macroeconomic Equilibrium.

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Aggregate Supply & Aggregate Demand

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Aggregate Supply & Aggregate Demand

Chapter 10-4 The Model


The AS–AD Model

The AS-AD model uses the aggregate supply curve and the aggregate demand curve together to analyze economic fluctuations.


The AS–AD Model


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.


Shifts of the SRAS Curve

Stagflation is the combination of inflation and falling aggregate output.


Shifts of the SRAS Curve


Shifts of Aggregate Demand: Short-Run Effects


Shifts of Aggregate Demand: Short-Run Effects


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.


Long-Run Macroeconomic Equilibrium


Short-Run Versus Long-Run Effects of a Negative Demand Shock

Recessionary gap


Short-Run Versus Long-Run Effects of a Positive Demand Shock

Inflationary gap


Self-correcting Mechanism

In the long run the economy is self correcting: shocks to aggregate demand do not affect aggregate output in the long run.


Negative Supply Shocks


Negative Supply Shocks

Negative supply shocks pose a policy dilemma: a policy that stabilizes aggregate output by increasing aggregate demand will lead to inflation, but a policy that stabilizes prices by reducing aggregate demand will deepen the output slump.


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