AP Economics
Mr. Bernstein
Module 19:
Equilibrium in the Aggregate DemandAggregate Supply Model
March 2016
AP Economics
Mr. Bernstein
Equilibrium in the Aggregate DemandAggregate 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 Economics
Mr. 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 > intersection
AD and SRAS, a surplus
exists and prices fall...
• Presumes economy is
usually in state of short-run
equilibrium
3
AP Economics
Mr. Bernstein
Shifts in AD: Short-Run Effects
• Demand Shock
• ie unexpected rise in
stock market boosting
Wealth Effect
• AD shifts to right
• Both Pe and Ye increase
4
AP Economics
Mr. Bernstein
Shifts in SRAS: Short-Run Effects
• Supply Shock
• ie unexpected rise in
commodity 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
5
AP Economics
Mr. 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
6
AP Economics
Mr. Bernstein
Long-Run Macroeconomic Equilibrium
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