Page 232 - Krugmans Economics for AP Text Book_Neat

What you will learn
in this Module:

• The difference between Module 19
short-run and long-run
macroeconomic equilibrium
• The causes and effects of Equilibrium in
demand shocks and supply
shocks
• How to determine if an the Aggregate
economy is experiencing a
recessionary gap or an
inflationary gap and how to Demand–Aggregate
calculate the size of output
gaps
Supply Model

The AD–AS Model

From 1929 to 1933, the U.S. economy moved down the short -run aggregate supply
curve as the aggregate price level fell. In contrast, from 1979 to 1980, the U.S. economy
moved up the aggregate demand curve as the aggregate price level rose. In each case, the
cause of the movement along the curve was a shift of the other curve. In 1929–1933, it
was a leftward shift of the aggregate demand curve—a major fall in consumer spending.
In 1979–1980, it was a leftward shift of the short -run aggregate supply curve—a dra-
matic fall in short -run aggregate supply caused by the oil price shock.
In the AD–AS model, the aggregate So to understand the behavior of the economy, we must put the aggregate supply
supply curve and the aggregate demand curve and the aggregate demand curve together. The result is the AD–AS model, the
curve are used together to analyze basic model we use to understand economic fluctuations.
economic fluctuations.
The economy is in short -run Short-Run Macroeconomic Equilibrium
macroeconomic equilibrium when the
quantity of aggregate output supplied is equal We’ll begin our analysis by focusing on the short run. Figure 19.1 shows the aggregate
to the quantity demanded. demand curve and the short -run aggregate supply curve on the same diagram. The
The short -run equilibrium aggregate point at which the AD and SRAS curves intersect, E SR , is the short -run macroeco-
price level is the aggregate price level in the nomic equilibrium: the point at which the quantity of aggregate output supplied is
short -run macroeconomic equili brium. equal to the quantity demanded by domestic households, businesses, the government,
Short -run equilibrium aggregate output and the rest of the world. The aggregate price level at E SR , P E , is the short -run equilib-
is the quantity of aggregate output produced rium aggregate price level. The level of aggregate output at E SR , Y E , is the short -run
in the short -run macroeconomic equilibrium. equilibrium aggregate output.

190 section 4 National Income and Price Determination