Macroeconomics

F I G U R E

9 - 8

Price level, P

Income, output, Y

Y

AD

1

AD

2

LRAS

A

B

1. A fall in aggregate

demand ...

3. ... but leaves 

output the same.

2. ... lowers

the price 

level in the 

long run ...

Shifts in Aggregate Demand

in the Long Run

A reduction

in the money supply shifts the

aggregate demand curve

downward from AD

1

to AD

2

.

The equilibrium for the econo-

my moves from point A to

point B. Because the aggregate

supply curve is vertical in the

long run, the reduction in

aggregate demand affects the

price level but not the level of

output.

---

they hire just enough labor to produce the amount demanded. Because the

price level is fixed, we represent this situation in Figure 9-9 with a horizontal

aggregate supply curve.

The short-run equilibrium of the economy is the intersection of the aggre-

gate demand curve and this horizontal short-run aggregate supply curve. In this

case, changes in aggregate demand do affect the level of output. For example, if

the Fed suddenly reduces the money supply, the aggregate demand curve shifts

inward, as in Figure 9-10. The economy moves from the old intersection of

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P A R T   I V

Business Cycle Theory: The Economy in the Short Run