1. Macroeconomic Equilibrium
The Ad-AS Model
Macroeconomic Equilibrium

2. Short-Run Macroeconomic Equilibrium
Short-run equilibrium (ESR) is the point where AD curve intersects the SRAS curve. It is the point at which aggregate output supplied equals aggregate quantity demanded
On the graph:
PE is the short-run equilibrium aggregate price level
YE is the short-run equilibrium aggregate output

3. Self-correcting nature of Equilibrium
If the price level is above the PE (like P2), quantity supplied exceeds quantity demanded, which leads to a fall in aggregate price level and movement back toward PE.
If the price level is below the PE (like P1), quantity supplied is less than demand, so prices will rise to move back to PE.
But this is in the LONG-RUN

4. AD Shifts
An event that shifts AD curve is known as a demand shock (whether negative or positive).
Demand shocks move Price Level and output in the same direction.
AD1
AD2

5. SRAS Shifts
An event that shifts SRAS curve is known as a supply shock (whether negative or positive).
SRAS3
Supply shocks move Price Level and output in the opposite directions.
SRAS2

6. Short-Run Effects of SRAS Shifts
Leftward shift of SRAS leads to stagflation – rising prices and falling output (as well as rising unemployment).
Rightward shift of SRAS results in more purchasing power and greater employment.