ECON 201 Lecture Notes - Lecture 19: Price Level, Aggregate Demand, Aggregate Supply

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8 Feb 2017
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Econ 201 Lecture 19 AD & AS Pt. 2
Long Run Aggregate Supply Curve
The long run aggregate supply curve shows the relationship between the
aggregate price level and the quantity of aggregate output supplied that would
exist if all prices, including nominal wages, were fully flexible
This is the maximum potential output our economy could achieve
It should come from a production function (see chapter 9)
Vertical on the graph
Can shift rightward
o Economic growth will shift it to the right
AD-AS Model
The AD-AS model uses the aggregate supply curve and the aggregate demand
curve together to analyze economic fluctuations
Short run macroeconomic equilibrium
o This is when the economy is producing where quantity of aggregate output
supplied = quantity demanded
o The short-run equilibrium aggregate price level is the aggregate price level
at the SR macroeconomic equilibrium
o The short-run equilibrium aggregate output is the quantity of aggregate
output produced at the SR macroeconomic equilibrium
Graphically, this is where SRAS and AD intersect
Shifts in AD or AS
A negative demand shock shifts the AD curve to the left
o Leads to lower aggregate price level and lower aggregate output
A positive demand shock shifts the AD curve to the right
o Leads to a higher aggregate price level and a higher aggregate output
A negative supply shock shifts the AS curve to the left
o Leads to a lower aggregate price level and a higher aggregate output
A positive supply shock shifts the AS curve to the right
o Leads to a higher aggregate price level and a lower aggregate output
These are what cause booms and busts
o The AD and AS curves are constantly being shifted by changing
circumstances
o This will lead to rises and falls in output, rises and falls in prices
LR Macroeconomic Equilibrium
The economy is in LR macroeconomic equilibrium when the point of SR
macroeconomic equilibrium is on the LRAS curve.
Recessionary gap: when aggregate output is below potential out
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