APMacro: AD-AS Review

AD-AS Full Employment

  • Aggregate demand (AD) and aggregate supply (AS) curves look and operate much like the supply and demand curves used in microeconomics. However, macroeconomic AD and AS curves depict different concepts, and they change for different reasons than do microeconomic demand and supply curves. AD and AS curves can be used to illustrate changes in real output and the price level of an economy.
  • The downward sloping aggregate demand curve is explained by the interest rate effect, the wealth effect and the net export effect. The wealth effect is also called the real balance effect.
  • Shifts in aggregate demand can change the level of output, the price level or both. The determinants of aggregate demand include consumer spending, investment spending, government spending, net export spending and money supply.
  • The aggregate supply curve can be divided into three ranges: the horizontal range, the upward sloping or intermediate range, and the vertical range.
  • Shifts in aggregate supply can also change the level of output and the price level. The determinants of AS include changes in input prices, productivity, the legal institutional environment and the quantity of available resources.
  • In the short run, economists think that equilibrium levels of GDP can occur at less than, greater than or at the full-employment level of GDP. Economists believe that long-run equilibrium can occur only at full employment.
  • In a dynamic aggregate demand and aggregate supply model of the economy, changes in wages and prices over time induce the economy to move to the long-run equilibrium.

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