SHORT-RUN/LONG-RUN
GRAPHING
Summary
Why Aggregate Demand Slopes
downward?



Think about AD from the perspective of the people
buying
price level = GDP because spending power
price level = GDP
because spending power
Aggregate
Price Level
AD
Real GDP
Aggregate Demand

Stuff that shifts the curve:
 Changes
in Expectations
 Optimistic
= AD
 Pessimistic = AD
 Changes
 Assets
 Assets
in Wealth
= AD
= AD
 Size
of the Existing Stock of
Physical Capital
 Small
stock = AD
 Large stock = AD
 Fiscal


Policy
G or tax cuts = AD
G or tax cuts = AD
 Monetary


Policy
quantity of $ = AD
quantity of $ = AD
Why does Aggregate Supply Slope
upward?



Think about this from the side of the supplier selling
price
price level = GDP because selling price
price level = GDP
Aggregate
Price Level
because selling price
SRAS
Real GDP
Shifts of the Short-Run Aggregate Supply

Stuff that shifts the curve:
 Changes
in Commodity Prices
 Price
falls = SRAS
 Price increases = SRAS
 Changes
in Nominal Wages
 Wages
fall = SRAS
 Wages increase = SRAS
 Changes
 More
in Productivity
productive = SRAS
 Less productive = SRAS
Long-Run Aggregate Supply Curve


Position gives the economy’s potential output
Shifts of the curve
 Increases
in the quality of resources, including land,
labor, capital, and entrepreurship
 Increases in the quality of resources: better-educated
workforce
 Technological progress
Demand Shock
Aggregate Price
Level
SRAS
P1
P2
AD1
AD2
Y2
Positive Shock or Negative Shock?
Y1
Real GDP
Supply Shock
Aggregate Price
Level
SRAS1
SRAS2
P1
P2
AD
Y1
Positive Shock or Negative Shock?
Y2
Real GDP
Long-Run Macroeconomic Equilibrium
LRAS
Aggregate Price
Level
SRAS
P1
P2
AD1
AD2
Y2
Y1 or YP
Is the initial event a Positive or Negative Shock?
Real GDP
LRAS
Aggregate Price
Level
SRAS1
SRAS2
P1
P2
AD1
P3
AD2
Y2
Y1 or YP
Real GDP