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Understanding Aggregate Demand and Supply in Macroeconomics

Explore the concepts of Aggregate Demand (AD) and Aggregate Supply (AS) curves, their relationships with price level and Real GDP, as well as the effects of Wealth, Interest Rate, and International Trade. Discover the dynamics of short and long run equilibrium, sticky prices, and the role of price levels in economic adjustments.

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Understanding Aggregate Demand and Supply in Macroeconomics

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  1. Chapter 7 Aggregate Demand and Aggregate Supply Hossain: MSMC

  2. Aggregate Supply (AS) Curve • In our last class we saw that Aggregate Demand (AD) curve is a relationship between • Price level and • Real GDP (RGDP) • This relationship is negative because of three effects: • Wealth Effects • Interest Rate Effects • International Trade Effects

  3. Aggregate Supply (AS) Curve • This negative relationship means, • When Price level rises, RGDP falls and • When Price level falls, RGDP rises • This negative relationship generates a downward sloping AD curve.

  4. Aggregate Supply (AS) Curve • Aggregate Supply (AS) is a relationship between: • Price level and • RGDP produced at each price level

  5. Short and Long Run The Short Run • A time period in which wages and some other prices are sticky (slow to adjust) • They do not respond to changes in economic conditions • In a short run equilibrium, market does not clear

  6. Short and Long Run Sticky Price • Price that is slow to adjust to its equilibrium level • Creating sustained periods of shortage or surplus • Stickiness of price determines the length of the short run

  7. Short and Long Run The Long Run • The long run in macroeconomic analysis, is a period in which wages and prices are flexible. • Here, price level acts as an adjustment mechanism that restores the equilibrium • In equilibrium,

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