SHORTRUNLONGRUN GRAPHING Summary Why Aggregate Demand Slopes downward

SHORT-RUN/LONGRUN GRAPHING Summary

Why Aggregate Demand Slopes downward? Think about AD from the perspective of the people buying 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 in Wealth Assets = AD � Size of the Existing Stock of Physical Capital Small stock = AD Large � Fiscal stock = AD Policy G or tax cuts = AD � Monetary Policy quantity of $ = AD

Why does Aggregate Supply Slope upward? Think about this from the side of the supplier selling price level = GDP because selling 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 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: bettereducated workforce � Technological progress

Demand Shock Aggregate Price Level SRAS P 1 P 2 AD 1 AD 2 Y 1 Positive Shock or Negative Shock? Real GDP

Supply Shock Aggregate Price Level SRAS 1 SRAS 2 P 1 P 2 AD Y 1 Positive Shock or Negative Shock? Y 2 Real GDP

Long-Run Macroeconomic Equilibrium LRAS Aggregate Price Level SRAS P 1 P 2 AD 1 AD 2 Y 1 or YP Is the initial event a Positive or Negative Shock? Real GDP

LRAS Aggregate Price Level SRAS 1 SRAS 2 P 1 P 2 AD 1 P 3 AD 2 Y 1 or YP Real GDP