Chapter 8: Output and Prices in the Short Run

Chapter Overview

This chapter discusses the aggregate supply-aggregate demand (AS-AD) model, which explains how fluctuations in production and prices contribute to the business cycle and overall economic performance.

Key Concepts

Demand Side of the Economy
  1. AE Shift and Equilibrium: Exogenous changes in the price level shift the aggregate expenditure (AE) curve and drive changes in real GDP equilibrium levels.
  2. Aggregate Demand Curve (AD): AD demonstrates combinations of real GDP and price levels where desired aggregate expenditure equals national income. Price level impacts caused shifts in the AE curve and induce movements along the AD curve.
Supply Side of the Economy
  1. Supply Dynamics: Aggregate supply (AS) is influenced by changes in factor prices and technology, impacting both short-run and long-run output.
  2. Short-Run vs Long-Run Supply: The short-run aggregate supply (SAS) curve is upward sloping, while the long-run aggregate supply (LAS) curve is vertical at potential GDP.
Macroeconomic Equilibrium
  1. Shocks to AD and AS: AD shocks can be expansionary or contractionary affecting equilibrium output; similar dynamics apply to AS shocks. These shocks influence not only GDP but also price levels, pushing the economy through shifts in IS and LM curves.