Aggregate Demand-Aggregate Supply Model

Aggregate Demand (AD): Total demand for final goods and services in an economy. AD = C + I + G + NX (Consumption + Investment + Government Spending + Net Exports).
Aggregate Supply (AS): Total supply of final goods and services in an economy.
Business Cycle: Short-run fluctuations evident in real GDP growth and unemployment rates.

Negative relationship with the price level due to:
- Wealth effect: Changes in aggregate demand due to wealth changes from price-level changes.
- Interest rate effect: Changes in interest rates influencing aggregate demand.
- International trade effect: Changes in net exports demanded.
Shifts in AD curve occur when factors other than the price level change:
- Consumption (C): Influenced by real wealth, expectations, and taxes.
- Investment (I): Influenced by expectations, interest rates, and money supply.
- Government Spending (G): Influenced by policy.
- Net Exports (NX): Influenced by income in other countries and exchange rates.

Long Run: All prices adjust; output depends on resources, technology, and institutions; the economy moves toward full-employment output (Y*).
Short Run: Some prices are sticky.
Long-Run Aggregate Supply (LRAS): Vertical; not affected by the price level.
Shifts in LRAS: Changes in resources, technology, and institutions.
Short-Run Aggregate Supply (SRAS): Positive relationship between the price level and quantity of aggregate supply due to sticky input prices, menu costs, and money illusion.
Shifts in SRAS: Changes in resource prices, price expectations, and supply shocks.

Long-run equilibrium: LRAS = SRAS = AD; economy at full employment with unemployment rate equal to the natural rate.

Shifts in curves affect equilibrium price level and real GDP.
Adjustments occur to restore long-run equilibrium after shocks to either AD or AS.