AP Economics

Mr. Bernstein

Module 19: Equilibrium in the Aggregate Demand-

Aggregate Supply Model

March 12, 2015

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AP EconomicsMr. Bernstein

Equilibrium in the Aggregate Demand-Aggregate Supply Model

Objectives - Understand each of the following:• The difference between short-run and long-run

macroeconomic equilibrium• The causes and effects of demand shocks and supply

shocks• How to determine if an economy is experiencing a

recessionary gap or an inflationary gap and how to calculate the size of the output gaps

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AP EconomicsMr. Bernstein

Short-Run Macroeconomic Equilibrium• Equilibrium is reached through same adjustment process

as in Micro supply/demand model• Price is the adjustment mechanism;ie when P is > intersectionAD and SRAS, a surplus exists and prices fall...• Presumes economy isusually in state of short-runequilibrium

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AP EconomicsMr. Bernstein

Shifts in AD: Short-Run Effects• Demand Shock• ie unexpected rise instock market boostingWealth Effect

• AD shifts to right• Both Pe and Ye increase

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AP EconomicsMr. Bernstein

Shifts in SRAS: Short-Run Effects• Supply Shock• ie unexpected rise incommodity prices due to geopolitical problem

• SRAS shifts to left• Pe rises but Ye decreases

• SRAS shifts to right• ie new technology• Pe falls and Ye increases

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AP EconomicsMr. Bernstein

Long-Run Macroeconomic Equilibrium• In Long Run all prices are flexible• AD, SRAS and LRAS curves all intersect at Yp

• Y < Yp is known as a Recessionary Gap or negative output gap

• Y > Yp is known as an Inflationary Gap or positive output gap

• The distance between short-run Ye and Yp is the output gap: 100*(Ye – Yp)/ Yp

• The economy is self-correcting

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AP EconomicsMr. Bernstein

Long-Run Macroeconomic Equilibrium