AP_Krugman_Textbook

What you will learn

in this Module:

190 section 4 National Income and Price Determination

• The difference between
  short-run and long-run
  macroeconomic equilibrium


• The causes and effects of
  demand shocks and supply
  shocks


• How to determine if an
  economy is experiencing a
  recessionary gap or an
  inflationary gap and how to
  calculate the size of output
  gaps

Module 19

Equilibrium in

the Aggregate

Demand–Aggregate

Supply Model

TheAD–ASModel

From 1929 to 1933, the U.S. economy moved down the short -run aggregate supply

curve as the aggregate price level fell. In contrast, from 1979 to 1980, the U.S. economy

moved up the aggregate demand curve as the aggregate price level rose. In each case, the

cause of the movement along the curve was a shift of the other curve. In 1929–1933, it

was a leftward shift of the aggregate demand curve—a major fall in consumer spending.

In 1979–1980, it was a leftward shift of the short -run aggregate supply curve—a dra-

matic fall in short -run aggregate supply caused by the oil price shock.

So to understand the behavior of the economy, we must put the aggregate supply

curve and the aggregate demand curve together. The result is the AD–ASmodel,the

basic model we use to understand economic fluctuations.

Short-Run Macroeconomic Equilibrium

We’ll begin our analysis by focusing on the short run. Figure 19.1 shows the aggregate

demand curve and the short -run aggregate supply curve on the same diagram. The

point at which the ADandSRAScurves intersect, ESR,is the short -run macroeco-

nomic equilibrium:the point at which the quantity of aggregate output supplied is

equal to the quantity demanded by domestic households, businesses, the government,

and the rest of the world. The aggregate price level at ESR,PE,is the short -run equilib-

rium aggregate price level.The level of aggregate output at ESR, YE,is the short -run

equilibrium aggregate output.

In the AD–ASmodel,the aggregate
supply curve and the aggregate demand
curve are used together to analyze
economic fluctuations.

The economy is in short -run
macroeconomic equilibriumwhen the
quantity of aggregate output supplied is equal
to the quantity demanded.

Theshort -run equilibrium aggregate
price levelis the aggregate price level in the
short -run macroeconomic equili brium.

Short -run equilibrium aggregate output
is the quantity of aggregate output produced
in the short -run macroeconomic equilibrium.