Chapter 10 FixedPrice Aggregate Demand Aggregate Supply Model

The Fixed Price Aggregate Demand/Aggregate Supply Model • The Fixed Price AD/AS Model –

The Aggregate Supply Curve • The Fixed-Price Aggregate Supply Curve plots the Aggregate Supply

The Equilibrium Level of Output • Because the Aggregate Supply curve is horizontal, the

The Equilibrium Level of Output • Equilibrium occurs at the point in which the

Shifts in the Aggregate Demand Curve • A change in any factor besides a

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Chapter 10 Fixed-Price Aggregate Demand/ Aggregate Supply Model © Online. Texts. com p. 1

The Fixed Price Aggregate Demand/Aggregate Supply Model • The Fixed Price AD/AS Model – assumes that the price level is fixed – Is appropriate to use in the very short run, or when the economy is in recession and resources are not fully utilized. • By assuming that the economy’s price level is fixed, the fixed-price AD/AS model is equivalent to the Income-Expenditure model. © Online. Texts. com p. 2

The Aggregate Supply Curve • The Fixed-Price Aggregate Supply Curve plots the Aggregate Supply curve, which is perfectly horizontal at the fixed price level, P A. © Online. Texts. com p. 3

The Equilibrium Level of Output • Because the Aggregate Supply curve is horizontal, the intersection of the Aggregate Demand Aggregate Supply curves depends only on the placement of the Aggregate Demand curve. • The equilibrium condition is the same as in the income-expenditure diagram: Y=C+I © Online. Texts. com p. 4

The Equilibrium Level of Output • Equilibrium occurs at the point in which the AD curve crosses the AS curve. © Online. Texts. com p. 5

Shifts in the Aggregate Demand Curve • A change in any factor besides a change in the price level that changes the level of consumption or investment shifts the AD curve and, hence, the equilibrium level of output. © Online. Texts. com p. 6