1. Equilibrium
By J.A. SACCO

2. AS>AD Equilibrium Recall- Intersection of demand and supply
* More complicated because of the two aggregate supply curves- but the concept is the same
If the price level – Excess quantity of real goods/services.
AS>AD
Result is suppliers drop the price
which will create greater quantity
of aggregate demand

3. Equilibrium SRAS LRAS AD 140 At price level 140 AS>AD and
the price level
falls.
Price Level
120
100 1 2 3 4 5 6 7 8 9 10
Real GDP per Year
($ trillions)

4. AD>AS Equilibrium Result is because of the shortage
If the price level Quantity of AD would be greater than quantity of AS.
Result is because of the shortage
buyers will bid up price which will
result in suppliers increasing the
quantity supplied.
AD>AS

5. Equilibrium SRAS LRAS AD 140 At price level 100 AD>AS and
the price level
increases.
Price Level
120
100 1 2 3 4 5 6 7 8 9 10
Real GDP per Year
($ trillions)

6. Equilibrium SRAS LRAS AD 140 At price level 120 AD=AS. Price Level 120
100 1 2 3 4 5 6 7 8 9 10
Real GDP per Year
($ trillions)

7. Two Types of Equilibrium
What is the state of the economy in the model to the right?
What is meant by long run equilibrium? Draw an example?
What is meant by short run equilibrium? Draw an example?
Which equilibrium is most important?
If the economy is at full equilibrium, this doesn’t mean the
economy will stay there . Economic “shocks” occur that may shift
the curves.

8. Consequences of Changes in Aggregate Supply and Demand
Shift in curves. The effect is the price level or real GDP may change or both.
Gives insight into inflation or recessions.
Aggregate Demand Shock
Any shock that causes the aggregate demand curve to shift inward or outward.
Aggregate Supply Shock
Any shock that causes the aggregate supply curve to shift inward or outward.
How does this effect the economy?

9. Consequences of Changes in Aggregate Supply and Demand
Contractionary Gap
Exist whenever the equilibrium level of real national income is less than the full-employment level

10. The Effects of Stable Aggregate Supply and a Decrease in Aggregate Demand: The Contractionary Gap
SRAS 7
LRAS
AD1
AD2
6.5
Price Level
120 E1 E2
6.8
Contractionary
Gap
115
Real GDP per Year
($ trillions)

11. Consequences of Changes in Aggregate Supply and Demand
Expansionary Gap
Exist whenever the equilibrium level of real national income is greater than the full- employment level

12. The Effects of Stable Aggregate Supply and an Increase in Aggregate Demand: The Expansionary Gap
SRAS 7
LRAS
AD1
Price Level
120 E1
Real GDP per Year
($ trillions)

13. The Effects of Stable Aggregate Supply and a Increase in Aggregate Demand: The Expansionary Gap
SRAS 7
LRAS
AD2
AD1
Price Level
120
7.6 E1
Real GDP per Year
($ trillions)

14. The Effects of Stable Aggregate Supply and a Increase in Aggregate Demand: The Expansionary Gap
SRAS 7
LRAS
AD2 E2
7.2
Expansionary
Gap
125
Price Level
120
120
7.6 E1
AD1
Real GDP per Year
($ trillions)

15. Explaining Inflation: Demand-Pull or Cost-Push?
Demand-Pull Inflation
Inflation caused by increases in aggregate demand not matched by increases in aggregate supply
Whenever the general level of prices rise because of continual increase in AD
Could occur when the amount of money in circulation increases faster than the growth of the economy

16. Intersection of AD2 and SRAS shows an increase in the price level.
The Effects of Stable Aggregate Supply and an Increase in Aggregate Demand: Demand-Pull Inflation
SRAS 7
LRAS
AD2
AD1
125 E2
7.2
Demand-Pull
Inflation
Price Level
120 E1
Real GDP per Year
($ trillions)
Intersection of AD2 and SRAS shows an increase in the price level.

17. Explaining Inflation: Demand-Pull or Cost-Push?
Cost-Push Inflation
Inflation caused by a continually decreasing short- run aggregate supply curve.
Caused by an increase in costs of inputs which decreases SRAS.
STAGFLATION!

18. The Effects of Stable Aggregate Demand and a Decrease in Aggregate Supply: Supply-Side Inflation7
LRAS
SRAS2
SRAS1
AD1 E2
125
6.8
Cost-Push
Inflation
Price Level
120 E1
Real GDP per Year
($ trillions)

19. The Oil Price Shock of the 1970s
3.0
LRAS
SRAS shifted
leftward due
to the restrictions
placed on the
supply of oil to
the U.S.
SRAS2
SRAS1
AD1 E2
120
2.8
Price Level
115 E1
Real GDP per Year
($ trillions)

20. The Oil Price Shock of the 1970s
Question
What would have happened to the LRAS if the price of oil had remained permanently high?