5 Steps to a 5 AP Macroeconomics 2019

Aggregate Demand and Aggregate Supply ❮ 119

When the economy is really booming, there is stronger demand for labor and all of

those other factors of production, and this causes factor prices to rise. As the factor prices

rise, the SRAS curve begins to shift to the left to SRAS 2. Eventually, the inflationary gap is

eliminated, and the economy is back in long­run equilibrium at GDPf, though at an even

higher aggregate price level of PL 3.

•    Using  the AD/AS   model   to   show   the long-run    adjustment  to   equilibrium    after   a    short-

run shift   in   AD is   a   very   common  FRQ on  the AP  Macroeconomics  exam.

9.4 The Trade-Off Between Inflation and Unemployment

Main Topics: Short-Run Changes in AD, The Phillips Curve, The Long-Run Phillips Curve,

Expectations

Changes in AD and AS create changes in our main macroeconomic indicators of inflation

and unemployment. Many economists have studied the relationship between inflation

and unemployment, and this section provides a very brief overview of one prominent

theory, the Phillips curve. We also take another look at the effects of supply shocks and

expectations.

Short-Run Changes in AD

In the upward­sloping range of the SRAS curve, there is a positive relationship between

the price level and output. If AD is rising, the price level and real GDP are both rising.

Since rising real GDP creates jobs and lowers unemployment, we connect these points of

equilibrium and show an inverse relationship between inflation and the unemployment

rate. See Figure 9.19.

Price

Level

LRAS

Qf Qi

PL 3

AD 1

AD (^2) SRAS
(^2) SRAS
1
PL 2
PL 1
Real GDP
Figure 9.18
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