SHORT-RUN ECONOMIC FLUCTUATIONS 12 SHORT-RUN ECONOMIC FLUCTUATIONS

Aggregate Demand and Aggregate Supply 33 Aggregate Demand and Aggregate Supply

Figure 1 A Look At Short-Run Economic Fluctuations Copyright © 2004 South-Western

Figure 1 A Look At Short-Run Economic Fluctuations Copyright © 2004 South-Western

Figure 1 A Look At Short-Run Economic Fluctuations Copyright © 2004 South-Western

Figure 2 Aggregate Demand and Aggregate Supply... Price Level Aggregate supply Aggregate demand Equilibrium output price level Quantity of Output Copyright © 2004 South-Western

Figure 3 The Aggregate Demand Curve... Price Level Aggregate demand P Y 1. A decrease in the price level . . . Y2 P2 Quantity of 2. . . . increases the quantity of goods and services demanded. Output Copyright © 2004 South-Western

Figure 4 The Long-Run Aggregate Supply Curve Price Level Long-run aggregate supply P 1. A change in the price level . . . P2 2. . . . does not affect the quantity of goods and services supplied in the long run. Natural rate Quantity of of output Output Copyright © 2004 South-Western

Figure 5 Long-Run Growth and Inflation 2. . . . and growth in the money supply shifts aggregate demand . . . Long-run aggregate supply, LRAS 1980 Y 1990 LRAS Y 2000 LRAS Price Aggregate Demand, AD 2000 Level 1. In the long run, technological progress shifts long-run aggregate supply . . . AD 1990 P 2000 4. . . . and ongoing inflation. P 1990 P 1980 AD 1980 Y 1980 3. . . . leading to growth in output . . . Quantity of Output Copyright © 2004 South-Western

Figure 6 The Short-Run Aggregate Supply Curve Price Level Short-run aggregate supply Y P 1. A decrease in the price level . . . Y2 P2 2. . . . reduces the quantity of goods and services supplied in the short run. Quantity of Output Copyright © 2004 South-Western

Figure 7 The Long-Run Equilibrium Price Level Long-run aggregate supply Short-run aggregate supply Aggregate demand A Equilibrium price Natural rate of output Quantity of Output Copyright © 2004 South-Western

Figure 8 A Contraction in Aggregate Demand 2. . . . causes output to fall in the short run . . . Price Level Short-run aggregate supply, AS Long-run aggregate supply Aggregate demand, AD AS2 AD2 3. . . . but over time, the short-run aggregate supply curve shifts . . . A P Y B P2 Y2 1. A decrease in aggregate demand . . . C P3 4. . . . and output returns to its natural rate. Quantity of Output Copyright © 2004 South-Western

Figure 10 An Adverse Shift in Aggregate Supply 1. An adverse shift in the short- run aggregate supply curve . . . Price Level Long-run Short-run aggregate supply, AS AS2 aggregate supply Aggregate demand B Y2 P2 Y A P 3. . . . and the price level to rise. Quantity of 2. . . . causes output to fall . . . Output Copyright © 2004 South-Western

Figure 11 Accommodating an Adverse Shift in Aggregate Supply 1. When short-run aggregate supply falls . . . Price Level Long-run Short-run aggregate supply, AS AS2 aggregate AD2 supply C P3 2. . . . policymakers can accommodate the shift by expanding aggregate demand . . . 3. . . . which causes the price level to rise further . . . P2 A P 4. . . . but keeps output at its natural rate. Aggregate demand, AD Natural rate Quantity of of output Output Copyright © 2004 South-Western