AD, LRAS, SRAS

Aggregate Demand (AD) Curve

The AD curve is downward sloping, indicating that as the price level falls, the quantity of goods and services demanded increases.

Wealth Effect

When households hold more money, their real wealth increases, leading to more consumption.

Interest Rate Effect

As the real interest rate goes down, investment increases, contributing to higher aggregate demand.

Exchange Rate Effect

When the U.S. dollar depreciates, U.S. goods become cheaper for foreign buyers, increasing net exports.

Factors that shift the Aggregate Demand Curve

Anything that changes consumption (C), investment (I), government spending (G), or net exports (NX) can shift the AD curve.

Short Run Aggregate Supply (SRAS) Curve

The SRAS curve is upward sloping, meaning that as the price level rises, the quantity of goods and services supplied increases.

Sticky Wages

In the short run, nominal wages are fixed, meaning that if prices rise, real wages adjust downward and production becomes more profitable.

Misperception Theory

Changes in price levels can mislead suppliers about actual market conditions, leading to increased production when real prices are perceived to rise.

Factors that shift SRAS

Changes in nominal input prices, exogenous production shocks, expected price levels, and changes in productivity can shift the SRAS.

Long Run Aggregate Supply (LRAS) Curve

The LRAS curve is vertical, indicating that in the long run, the economy's production of goods and services is determined by factors of production.

Self-Correcting Mechanism

Changes in wages and price expectations adjust to return the economy to its natural level of output in the long run without government intervention.

Shifts in LRAS Curve

Factors affecting labor, capital, natural resources, or productivity can shift the LRAS curve.