SHORT-RUN/LONG-RUN GRAPHING Summary

Why Aggregate Demand Slopes downward?  Think about AD from the perspective of the people buying  price level = GDP because spending power  price level = GDP because spending power Aggregate Price Level Real GDP AD

Aggregate Demand  Stuff that shifts the curve:  Changes in Expectations Optimistic = AD Pessimistic = AD  Changes in Wealth Assets = AD  Size of the Existing Stock of Physical Capital Small stock = AD Large stock = AD  Fiscal Policy G or tax cuts = AD  Monetary Policy quantity of $ = AD

Why does Aggregate Supply Slope upward? Aggregate Price Level Real GDP SRAS  Think about this from the side of the supplier selling price  price level = GDP because selling price  price level = GDP because selling price

Shifts of the Short-Run Aggregate Supply  Stuff that shifts the curve:  Changes in Commodity Prices Price falls = SRAS Price increases = SRAS  Changes in Nominal Wages Wages fall = SRAS Wages increase = SRAS  Changes in Productivity More productive = SRAS Less productive = SRAS

Long-Run Aggregate Supply Curve  Position gives the economy’s potential output  Shifts of the curve  Increases in the quality of resources, including land, labor, capital, and entrepreurship  Increases in the quality of resources: better-educated workforce  Technological progress

Demand Shock Aggregate Price Level Real GDP SRAS AD 1 AD 2 Y2Y2 Y1Y1 P2P2 P1P1 Positive Shock or Negative Shock?

Supply Shock Aggregate Price Level Real GDP SRAS 1 AD Y2Y2 Y1Y1 P2P2 P1P1 SRAS 2 Positive Shock or Negative Shock?

Long-Run Macroeconomic Equilibrium Real GDP Aggregate Price Level SRAS AD 1 AD 2 Y2Y2 Y 1 or Y P P2P2 P1P1 LRAS Is the initial event a Positive or Negative Shock?

Aggregate Price Level SRAS 1 AD 1 AD 2 Y2Y2 Y 1 or Y P P2P2 P1P1 LRAS Real GDP SRAS 2 P3P3