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
Chapter 10-4 The Model
The AS-AD model uses the aggregate supply curve and the aggregate demand curve together to analyze economic fluctuations.
Stagflation is the combination of inflation and falling aggregate output.
The economy is in long-run macroeconomic equilibrium when the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve.
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 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.