The aggregate demand-aggregate supply model: a brief overview: ad-as has 2 advantages over keynesian model: factors constant] inflation rate [other factors constant] potential output y* level of gdp that is above or below potential. The aggregate demand curve: graph, current level of output [y] = horizontal axis, ad-as is short and long run, key. Why does the ad curve slope downward? decrease in short run equilibrium output. Inflation rate and planned spending connected through monetary policy rule: inflation raises, fed reserve increase real interest rate. Demand shocks: changes in output & inflation rate, planned spending affected by, output gap starts to close as actual output y falls relative to potential, recessionary gap opens, inflation falls. Rise: changes in willingness of foreigners to purchase domestic goods or domestic residents to purch. foreign good affect planned level of nx, decreased business confidence or new tech opp.