Macroeconomic Equilibrium The Ad-AS Model Macroeconomic Equilibrium

Short-Run Macroeconomic Equilibrium Short-run equilibrium (ESR) is the point where AD curve intersects the SRAS curve. It is the point at which aggregate output supplied equals aggregate quantity demanded On the graph: PE is the short-run equilibrium aggregate price level YE is the short-run equilibrium aggregate output

Self-correcting nature of Equilibrium If the price level is above the PE (like P2), quantity supplied exceeds quantity demanded, which leads to a fall in aggregate price level and movement back toward PE. If the price level is below the PE (like P1), quantity supplied is less than demand, so prices will rise to move back to PE. But this is in the LONG-RUN

AD Shifts An event that shifts AD curve is known as a demand shock (whether negative or positive). Demand shocks move Price Level and output in the same direction. AD1 AD2

SRAS Shifts An event that shifts SRAS curve is known as a supply shock (whether negative or positive). SRAS3 Supply shocks move Price Level and output in the opposite directions. SRAS2

Short-Run Effects of SRAS Shifts Leftward shift of SRAS leads to stagflation – rising prices and falling output (as well as rising unemployment). Rightward shift of SRAS results in more purchasing power and greater employment.