Aggregate Supply
Upward-sloping in the short run
Because some factors and costs are fixed

Vertical in the long run
Factor prices adjust fully to the price level

SRAS
Three regions
Keynesian region – horizontal
(underemployment equilibrium)
Upward-sloping region
Physical-limit region – vertical at 100% employment and 100% capacity utilization

LRAS
Vertical at the full-employment level of real GDP
Aggregate Demand AD
Demand for real GDP
P, Y space
P is the price level
CPI or GDP deflator

AD v. Demand for a single good
Micro Demand Curve
Downward-sloping for two reasons:
Substitution effect
Income effect

No substitution in macro
“There is no substitute for GDP”

Downward-sloping AD
Wealth effect (Real balance effect)
Interest rate effect (Intertemporal substitution effect)
International trade effect (International substitution effect)

The AD & the AE
The AD can be derived from the Keynesian AE
As the price level rises, the AE falls, causing equilibrium GDP to fall
Hence a downward-sloping AD

AD is not an exclusively Keynesian model

The Great Depression
Fed tightened money supply policy
Stock market crashed
AD collapsed
Fed failed to expand money supply enough to support AD
Low price level, if you were employed, everything was cheap, but wages were low

Nixon
Expanding G and M shifted AD to the right
Created inflationary pressure
Wage and price controls created shortages (excess demand)
“Repressed inflation”

The “Belle Epoque”
1980 – 2010, and hopefully longer
Fed policy can be understood as AD control