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AP Economics

AP Economics. Mr. Bernstein Module 19: Equilibrium in the Aggregate Demand-Aggregate Supply Model March 24, 2014. AP Economics Mr. Bernstein. Equilibrium in the Aggregate Demand-Aggregate Supply Model Objectives - Understand each of the following:

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AP Economics

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  1. AP Economics Mr. Bernstein Module 19: Equilibrium in the Aggregate Demand-Aggregate Supply Model March 24, 2014

  2. AP EconomicsMr. Bernstein Equilibrium in the Aggregate Demand-Aggregate Supply Model Objectives - Understand each of the following: • 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 the output gaps

  3. AP EconomicsMr. Bernstein Short-Run Macroeconomic Equilibrium • Equilibrium is reached through same adjustment process as in Micro supply/demand model • Price is the adjustment mechanism; ie when P is > intersection AD and SRAS, a surplus exists and prices fall... • Presumes economy is usually in state of short-run equilibrium

  4. AP EconomicsMr. Bernstein Shifts in AD: Short-Run Effects • Demand Shock • ie unexpected rise in stock market boosting Wealth Effect • AD shifts to right • Both Pe and Ye increase

  5. AP EconomicsMr. Bernstein Shifts in SRAS: Short-Run Effects • Supply Shock • ie unexpected rise in commodity prices due to geopolitical problem • SRAS shifts to left • Perises but Yedecreases • SRAS shifts to right • ie new technology • Pefalls and Yeincreases

  6. AP EconomicsMr. Bernstein Long-Run Macroeconomic Equilibrium • In Long Run all prices are flexible • AD, SRAS and LRAS curves all intersect at Yp • Y < Yp is known as a Recessionary Gap or negative output gap • Y > Yp is known as an Inflationary Gap or positive output gap • The distance between short-run Ye and Yp is the output gap: 100*(Ye – Yp)/Yp • The economy is self-correcting

  7. AP EconomicsMr. Bernstein Long-Run Macroeconomic Equilibrium

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