Module 3.5 Notes: Equilibrium in the AD-AS Model

Module 3.5: Equilibrium in the Aggregate Demand-Aggregate Supply Model

Mastering the Graph: The ACE Method

To excel in understanding and drawing AD-AS graphs for tests and the AP exam, remember the ACE method:

• A is for Axis:

  • The y-axis represents the $ext{Price Level}$.

  • The x-axis represents $ext{Real GDP}$.

• C is for Curves:

  • The Aggregate Demand (AD) curve is downward sloping.

  • The Short-Run Aggregate Supply (SRAS) curve is upward sloping.

  • The Long-Run Aggregate Supply (LRAS) curve is vertical.

• E is for Equilibrium:

  • Mark equilibrium points with dotted lines extending to both axes.

  • Crucially, label the axes at the points indicated by the dotted lines (e.g., $ext{P<em>e}$ for equilibrium price level, $ext{Y</em>e}$ for equilibrium output).

Short-Run Equilibrium

• Definition: The intersection of the Aggregate Demand (AD) and Short-Run Aggregate Supply (SRAS) curves.

• Significance: This intersection determines the current price level and current output of the economy.

• Concept: It represents a