AD-AS Model

AD Curve

Relates aggregate quantity of output $(Y)$ to price level $(P)$

Aggregate Quantity of Output Demanded $(Y)$

$Y^d=C^d+I^d+G$

AD curve is downwards sloping

$P\uparrow ⟹Y^d\downarrow$

• intuition: purchasing power decreases

Factors that Shift AD Curve

Shifts that will affect this equation: $Y^d=C^d+I^d+G$

Connection to IS-LM model

AD curve is the equilibria points in the IS-LM Model

As $P\uparrow ,$

$r\uparrow ⟹C^d\downarrow I^d\downarrow$

SRAS Curve

in short run all prices are fixed $⟹$ SRAS is horizontal

Consider: how much will firms be willing to supply at a fixed price

• Firms will sell as much as customers will buy
• Profit increases as Q increases b/c price level fixed

in solving refer to Profit = (Price - Cost)Quantity

if $P\uparrow$ in the short run, SRAS shifts up

LRAS Curve

• In long run prices adjust and markets reach EQ
• Output supplied = Full-Employment Output $(\bar{Y})$

$$\bar{Y}=AF(\bar{K},\bar{N})$$

Equilibrium

Short Run Equilibrium

Given by intersection of AD and SRAS curves

Long Run Equilibrium

Given by intersection of AD and LRAS Curves