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Aggregate Demand
‡ A change in the price level shifts the AE curve upward when the
price level falls and downward when the price level rises. A new
equilibrium level of GDP results.
‡ The AD curve plots the equilibrium level of GDP that corresponds to
each possible price level. A change in equilibrium GDP following a
change in the price level is shown by a movement along the AD
curve.
‡ A rise in the price level lowers exports and lowers private
consumption spending [because it decreases consumer¶s wealth].
Both of these changes lower equilibrium GDP and cause the
aggregate demand curve to have a negative slope.
‡ The AD curve shifts when any element of autonomous expenditure
changes, and the simple multiplier measures the magnitude of the
shift. This multiplier also measures the size of the change in
equilibrium GDP when the price level remains constant and firms
produce evrything that is demanded at tha price level.
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Aggregate Supply and Macroeconomic Equilibrium

‡ The short-run aggregate supply [SRAS] curve, drawn for given input
prices, is positively sloped because unit costs rise with increasing
output and because rising product prices make it profitable to
increase output. An increase in productivity or a decrease in input
prices shifts the curve to the right. A decrease in productivity or an
increase in input prices has the opposite effect.
‡ Macroeconomic equilibrium refers to equilibrium values of real GDP
and the price level, as determined by the intersection of the AD and
SRAS curves. Shifts in the AD and SRAS curves, called aggregate
demand shocks and aggregate supply shocks, change the equilibrium
values of real GDP and the price level.
‡ Changes in GDP and the Price Level
‡ When the SRAS curve is positively sloped, an aggregate demand
shock causes the price level and real GDP to move in the same
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‡ direction, the division between these effects depending on the shape

of the SRAS curve. The main effect is on real GDP when the SRAS
curve is flat and on the price level when it is steep.
‡ An aggregate supply shock moves equilibrium real GDP along the
AD curve, causing the price level and output to move in opposite
directions. A leftward shift in the SRAS curve causes a stagflation -
rising prices and falling output. A rightward shift causes an increase
in real GDP and a fall in the price level. The division of the effects of
a shift in SRAS between a change in real GDP and a change in the
price level depends on the shape of the AD curve.