Relationship between GDP and Unemployment… Now lets add PL changes… This is the Aggregate Model.

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Presentation transcript:

Relationship between GDP and Unemployment… Now lets add PL changes… This is the Aggregate Model

Aggregate Demand (AD)  Shows the amount of Real GDP that the private, public and foreign sector collectively desire to purchase at each possible price level

PL GDP R Aggregate Demand Curve AD

Does AD slope downward for the same reasons that regular Demand slopes downward?

Long-Run v. Short-Run  Long-Run  Period of time where production cost (like labor) are able to adjust to inflation  Short-Run  Period of time where input prices are ‘sticky’ and do not adjust to changes in the price-level

Long-Run Aggregate Supply (LRAS)  The Long-Run Aggregate Supply (LRAS) marks the level of full employment in the economy LRAS

Short-Run Aggregate Supply (SRAS)  Because input prices are sticky in the short-run, the SRAS is upward sloping. SRAS

The AS/AD Model  The equilibrium of AS & AD determines current output (GDP R ) and the price level (PL) GDP R PL AD SRAS

Shifts in AD and SRAS  AD shifts are caused by changes in C, Ig, G, and/or Xn  Increases in AD = AD   Decreases In AD = AD   SRAS shifts are caused by changes in production costs