1. Equilibrium in the Aggregate Demand-Aggregate Supply Model
Coryna Calero
Marcos Carriedo
Nathalia Escobar
Equilibrium in the Aggregate Demand-Aggregate Supply Model

2. Short-Run Macroeconomic Equillibrium
The point at which the quantity of aggregate output equal to the quantity demanded by domestic households, businesses, government, and the rest of the world.

3. Long-Run Macroeconomic Equillibrium
The equilibrium in the long-run is shown by the intersection of the Aggravate demand AD curve, the Short-run Aggravate Supply SAS curve, and the Long-Run Aggregate Supply (LAS) curve
Since LAS represents potential output, a shift in the AD curve will only result in a change in price level: a shift to the right increasing price level and a shift to the left decreasing price level.
If an economy is said to be in long-run equilibrium, then Real GDP is at its potential output, the actual unemployment rate will equal the natural rate of unemployment (about 6%), and the actual price level will equal the anticipated price level. 

4. Long-Run Macroeconomic Equilibrium Chart

5. Demand Shocks
Any sudden event that dramatically but temporarily increases or decreases demand for one or more goods or services. The event may result from government intervention, such as a change in money supply, or may be a random occurrence in the market.

6. Positive and Negative Demand Shocks
A positive demand shock causes increase in demand, while a negative demand shock causes decrease in demand. Both positive and negative demand shock have an effect on the prices of goods and services.
For example, a company announcing that it is discontinuing a certain product may see an increase in demand for that product because people want to buy it while they can. This results in an increase in price for that product.
However, if that company decides not to discontinue the brand, demand will likely be stable resulting in a return to equilibrium.

7. Demand Shocks Graph

8. Supply Shocks
An even that suddenly changes the price of a commodity or service.

9. Positive and Negative Supply Shocks
A positive supply shock would be if technology made a good or service easier to produce so the price would drop.
A negative supply shock happens when the price of something increases drastically.
An example would be when the oil spill happened in the gulf of Mexico the price of fish and other seafood harvested there increased.

10. Supply Shocks Chart

11. Aggregate Demand and Aggregate Supply
Aggregate Demand: The total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a country when inventory levels are static.
Aggregate Supply: The total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms are willing to sell at a given price level in an economy.

12. Aggregate Demand and Aggregate Supply Chart

13. Recessionary Gap When aggregate output is below potential output.
It summarizes the situation where an economy is operating at below its full-employment equilibrium. Under this condition, the level of real GDP is currently lower then it is at full-employment, which puts downward pressure on prices in the long run.

14. Recessionary Gap (cont.)

15. Inflationary Gap When aggregate output is above potential output.
Describes the distance between the current level of real GDP and full employment (long run equilibrium) real GDP. The inflationary gap is so named because the relative increase in real GDP causes an economy to increase its consumption, which causes prices to rise in the long run.

16. Inflationary Gap (cont.)

17. How to Calculate the Size of Output Gaps
The percentage difference between actual aggregate output and potential output.
If the calculation ends up as a positive number, it’s an inflationary gap and shows the growth of aggregate demand is outpacing the growth of aggregate supply which represents inflation. If the calculation ends up as a negative number it is called a recessionary gap which represents deflation.