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Copyright © 2002 Pearson Education, Inc.
Aggregate DemandAggregate demand for current output, Yd, is:
Yd = C + I + G + NX.The AD curve slopes downward because an increase in the
price level reduces the aggregate demand for output:
P up …(M/P) falls … wealth falls … C down
P up …(M/P) falls … real interest rate up … C and I down
P up …(M/P) falls … real rate up … $ rises … NX down
P up …Exports fall and Imports rise
Copyright © 2002 Pearson Education, Inc. Slide 25-2
Aggregate Demand Curve
Copyright © 2002 Pearson Education, Inc. Slide 25-3
Copyright © 2002 Pearson Education, Inc.
Aggregate Supply The aggregate supply curve shows the output
supplied at each price level. The short-run aggregate supply curve slopes upward
New Classical “misperceptions”
New Keynesian stick prices: long-term and staggered contracts, menu costs The long-run aggregate supply curve is vertical at full
employment output, Y * The Green Shaft The LRAS shifts over time to reflect growth in the full-
employment level of output Changes in productivity
Technology Incentives
Increases in Kapital stock and in laborforce
Copyright © 2002 Pearson Education, Inc. Slide 25-5
The Short-Run and Long-Run Aggregate Supply Curves
Copyright © 2002 Pearson Education, Inc. Slide 25-6
Copyright © 2002 Pearson Education, Inc.
Equilibrium
The short-run equilibrium occurs at the intersection of the AD and SRAS curves.
In the long run the price level adjusts and output returns to Y *…The GREEN SHAFT The real business cycle view argues short-term output
changes due to productivity shocks.
Copyright © 2002 Pearson Education, Inc. Slide 25-8
Short-Run Equilibrium
Copyright © 2002 Pearson Education, Inc. Slide 25-9
Adjustment to Long-Run Equilibrium:Price at E1’ is above Pe SRAS shifts up
Copyright © 2002 Pearson Education, Inc. Slide 25-10
Short-Run Results in the Real Business Cycle Model
Copyright © 2002 Pearson Education, Inc.
Economic Fluctuations in the United States
From 1964-1969: Expansionary monetary and fiscal policies caused AD to shift right.
From 1973-1975: A supply shock resulted in SRAS shifting up and to the left.
1990-1991: A credit crunch, shifting AD to the left, which resulted in SRAS shifting down and to the right.
Copyright © 2002 Pearson Education, Inc. Slide 25-12
Output Growth and Inflation, 1960-2000
