1. Chapter 11- Aggregate Demand/Aggregate Supply
4/22/2019
Chapter 11- Aggregate Demand/Aggregate Supply
Objective – Students will be able to answer questions regarding the AD/AS model.
SECTION 1
© 2001 by Prentice Hall, Inc.

2. Full Employment
Full Employment equilibrium exists where AD intersects SRAS & LRAS at the same point.
LRAS
SRAS PL P AD YF
GDPR

3. Changes (Δ) in SRAS Δ Input Prices
Input Prices↓ .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
Input Prices↑ .: SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑
Δ Productivity
Productivity↑ .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
Productivity↓ .: SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑
Δ Legal-Institutional Environment
Deregulation .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
Regulation .: SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑

4. Practice Problem
Graph and explain what would happen to the equilibrium PL, GDPr, u%, and π% in the short run if the economy is in full employment equilibrium and there is a decrease in input costs.

5. Increase in SRAS SRAS LRAS PL SRAS1  P  P1 AD  Y YF GDPR
Input Prices↓, Productivity↑, and/or Deregulation
.: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓

6. Decrease in SRAS SRAS1 LRAS PL SRAS  P1  P AD  Y1 YF GDPR
Input Prices↑, Productivity↓, and/or Regulation
.: SRAS  .: GDPR↓ & PL↑ .: u%↑ & π%↑

7. AS / AD Summary ΔC, ΔIG, ΔG, and/or ΔXN = Δ AD
AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
Δ Input Prices, Δ Productivity,
and/or Δ Regulation = Δ SRAS
SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑
The AS/AD Model is the most important graph in AP Macroeconomics.
KNOW IT!!!

8. PL Yf As Classical Range Intermediate Range Keynesian Range Ad
Q =Real GDP=Y

9. Shifts in LRAS:
LRAS
LRAS1 PL
Productivity
SRAS
Q & Q of
natural resources
Capital Stock
Health & Edu.
5. Technology AD
RGDP = Y Yf

10. Section 1 Assessment
Graph and explain what would happen to the equilibrium PL, GDPr, u%, and π% in the short run if the economy is in full employment equilibrium and there was a decrease in government regulation.
2. Graph and explain what would happen to the equilibrium PL, GDPr, u%, and π% in the short run if the economy is in full employment equilibrium and there is an increase in input prices.

11. Summary: In a paragraph, describe what you have learned today.