CHANGES IN AGGREGATE DEMAND

Expectations International factors Fiscal policy Monetary Policy

Price level
(GDP deflator)

AD2
Decrease in Aggregate demand Increase in aggregate demand

AD0

AD1

Real GDP

Changes in the Aggregate Demand

There are two time frames for aggregate supply : Long-run aggregate supply Short-run aggregate supply

LONG RUN AGGREGATE SUPPLY :

It is the relationship between the quantity of real GDP and the price level in the long run when real GDP equals potential GDP.

Price Level (GDP deflator)

160 150 140 130 120 110 Potential GDP

5.5

6.5

7.5

Along the long-run aggregate supply curve , as the price level changes the real GDP remains at the potential GDP the long-run aggregate supply curve is always vertical and located at potential GDP.

Why?
potential GDP is independent of the price level. A movement along the long-run aggregate supply curve is accompanied by changes in the following two by equal percentage the prices of factors of productions and the prices of goods and services. the relative prices and real wage rates remains constant, so Real GDP also remains constant .

The short run aggregate supply (SAS) curve shows the relationship between the quantity of real GDP supplied and the price level when money wage rate , other factor prices and potential GDP are constant. The short-run aggregate supply curve is upward sloping because firms costs increases as the rate of output increases so a higher price is needed to bring an increase in the quantity produced.

CHANGES IN THE AGGREGATE SUPPLY

An increase in the labor hour and an increase in the productivity increase potential GDP, which increase both the long-run aggregate supply and short-run aggregate supply and shifts the LAS and SAS rightward.
Price level 160 LAS 0 LAS1 SAS0 (GDP deflator) 150 140 130 120

SAS1

110

Real GDP ( trillions of dollars )

 An increase in the money wage rate (or other factor prices ) decreases the short run supply curve but leaves the long-run supply curve unchanged. The SAS curve shifts leftward.
160 LAS Rise in money wage rate SAS2

150
Price level (GDP deflator) 140

SAS0

130
120 110

5 Real GDP

MACROECONOMIC EQUILIBRIUM
Short run Macroeconomic Equilibrium

Long run Macroeconomic Equilibrium