1. Fixed-Price Aggregate Demand/ Aggregate Supply Model
Chapter 10
Fixed-Price Aggregate Demand/ Aggregate Supply Model
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2. The Fixed Price Aggregate Demand/Aggregate Supply Model
The Fixed Price AD/AS Model
assumes that the price level is fixed
Is appropriate to use in the very short run, or when the economy is in recession and resources are not fully utilized.
By assuming that the economy’s price level is fixed, the fixed-price AD/AS model is equivalent to the Income-Expenditure model.
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3. The Aggregate Supply Curve
The Fixed-Price Aggregate Supply Curve plots the Aggregate Supply curve, which is perfectly horizontal at the fixed price level, PA.
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4. The Equilibrium Level of Output
Because the Aggregate Supply curve is horizontal, the intersection of the Aggregate Demand and Aggregate Supply curves depends only on the placement of the Aggregate Demand curve.
The equilibrium condition is the same as in the income-expenditure diagram:
Y = C + I
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5. The Equilibrium Level of Output
Equilibrium occurs at the point in which the AD curve crosses the AS curve.
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6. Shifts in the Aggregate Demand Curve
A change in any factor besides a change in the price level that changes the level of consumption or investment shifts the AD curve and, hence, the equilibrium level of output.
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