APMacro: AD AS Equilibrium


The point at which the aggregate supply (AS) and aggregate demand (AD) curves meet indicates the equilibrium price level and level of output or real GDP. it also gives the level of employment and unemployment because producing GDP requires workers. If real GDP is low, employment will be low and unemployment will be high. If real GDP is high, employment will be high and unemployment low. The intersection of the downward sloping AD curve, the short-run AS curve and the vertical long-run AS is called the full employment equilibrium since it occurs at the full employment output.

AD-AS Full Employment

If the economy is producing at full-employment output, an increase in aggregate demand causes demand-pull inflation.

AD-AS Demand Pull Inflation

Demand-pull inflation causes both prices and output increase, and an inflationary gap illustrates the amount by which current output exceeds full-employment output. The multiplier effect of the increase in demand is reduced by the increase in price level.

AD-AS Recession

A decrease in aggregate demand causes a recessionary gap and an increase in cyclical unemployment. But because prices and wages are downwardly “sticky,” the multiplier works at full strength, so the entire effect of the decreased demand accrues to output and employment.

AD-AS Cost Push Inflation

Decreases in aggregate supply cause cost-push inflation. As costs of production rise, firms reduce output and pass those increased costs on to consumers in the form of higher prices. An increase in aggregate supply increases national output without causing an increase in the price level.


 

Homework:
1) Read Chapter 10.3 pp.196-202

Arrows-02-june

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