1. Aggregate Equilibrium
Macroeconomic Theory

2. Inflationary Gap Recessionary Gap Economy above full output
Economy below full output
LRAS1
Price
Level
Real
GDP
SRAS1
LRAS1
Price
Level
Real
GDP
SRAS1
AD1
AD1 P1 Y1 E1 P1 Y1 E1 Y* Y*
Unemployment high, real output low
Below PPF, Actual Px level < Expected
Unemployment very low, output high
Above PPF, Actual Px level > Expected

3. Note: you are graphing actual price level
Short Run Equilibrium
In short run, a shift in AD will cause changes in real GDP, Unemployment & price level
Reason: Prices & Wages are sticky
expected price level LAGS actual price level
This allows recessionary & inflationary gaps
Note: you are graphing actual price level

4. Long Run Equilibrium
In long run, AD shifts do not affect real output (or employment)
Prices/wages become perfectly flexible in long run
Actual price level must equal expected price level
Will always be at full potential output (full employment)

5. LONG RUN EQUILIBRIUM IN A LONG RUN EQUILIBRIUM: 3 Things must be true:
1) Expected Price Level = Actual Price Level
2) Employment = Full Employment
3) Real GDP = Full Potential Output
(on PPF)
Quantity = Natural rate a( Actual Px Expected Px)
Supplied of Output ( Level Level )
Equation from Textbook (you do not need to understand this….)

6. Manipulating AD/AS Worksheet

7. Example: Stock Market Crash
2- causes output to fall in short run . . .
Short run —Step 1 & 2
Price
Long Run– Step 3 & 4
Level
LRAS
SRAS1
AD1
SRAS2
AD2
but over
time, SRAS shifts
as expected
Price level falls
. . A P Y B P2 Y2
1-Decrease in AD C P3
and output returns
to its natural rate. .
Real GDP