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THE AD-AS MODEL Macroeconomic Equilibrium. Short-Run Macroeconomic Equilibrium  Short-run equilibrium (E SR ) is the point where AD curve intersects.

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Presentation on theme: "THE AD-AS MODEL Macroeconomic Equilibrium. Short-Run Macroeconomic Equilibrium  Short-run equilibrium (E SR ) is the point where AD curve intersects."— Presentation transcript:

1 THE AD-AS MODEL Macroeconomic Equilibrium

2 Short-Run Macroeconomic Equilibrium  Short-run equilibrium (E SR ) 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:  P E is the short-run equilibrium aggregate price level  Y E is the short-run equilibrium aggregate output

3 Self-correcting nature of Equilibrium  If the price level is above the P E (like P 2 ), quantity supplied exceeds quantity demanded, which leads to a fall in aggregate price level and movement back toward P E.  If the price level is below the P E (like P 1 ), quantity supplied is less than demand, so prices will rise to move back to P E.  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. AD 1 AD 2

5 SRAS Shifts  An event that shifts SRAS curve is known as a supply shock (whether negative or positive). Supply shocks move Price Level and output in the opposite directions. SRAS 2 SRAS 3

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.


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