Shalom's AP Econ Blog

The equilibrium of AS and AD determines current output (GDPR) and the price level (PL) Full Employment:  occurs where AD intersects SRAS and LRAS at the same time. Recessionary Gap: exists when equilibrium is below full employment output Inflationary Gap: exists when equilibrium is beyond full employment output Changes in AD (u = employment, 𝛑 = inflation) Consumption  Gross Private Investment Government Spending Net Exports Changes in SRAS:  Input prices Productivity  Legal Institutional Environment 

Aggregate Supply: The level of real GDP (GDPR)  that firms will produce at each price level (PL) Long Run v. Short Run Long Run period of time where input prices are completely flexible and adjust to changes in the price level, always vertical the level of real GDP supplied is independent of the price level the Long-Run Aggregate Supply (LRAS) marks the level of full employment in the economy (analogous to PPC)  vertical Short Run period of time where input prices are sticky and do not adjust to changes in the price level the level of real GDP supplies is directly related to the price level because input prices are sticky in the short-run, the Short-Run Aggregate Supply (SRAS) is upward sloping upward sloping  Changes in SRAS  an increase in SRAS is seen as a shift to the right a decrease is seen as a shift to the left the key to understanding shifts in SRAS is per unit cost of production per-unit production cost = tot...

Aggregate Demand (AD): shows the amount of real GDP that the private, public, and foreign sector collectively desire to purchase at each possible price level; the demand by consumers, businesses, government, and foreign countries the inverse relationship between price level and real GDP level AD = C + I + G + Xn Curve X Axis: real domestic output Curve Y Axis: price level Changes in price level cause a move along the curve not a shift of the curve 3 Reasons Why AD is Downward Sloping:  1. The Wealth Effect Higher prices reduce the purchasing power of $ This decreases the quantity of expenditures Lower price levels increase purchasing power and increase expenditures Ex: If the balance in your bank was $50,000 but inflation erodes your purchasing power, you will be likely to reduce your spending Price level goes up, GDP demanded goes down 2. The Interest-Rate Effect  As price level increases, lenders need to charge higher int...