Macroeconomics

F I G U R E  

1 4 - 4

Inflation, 

p

Income, output, Y

DAS

t

Y

t

Y

t

DAD

t

Natural level

of output

Short-run

equilibrium

The Short-Run Equilibrium

The

short-run equilibrium is determined

by the intersection of the dynamic

aggregate demand curve and the

dynamic aggregate supply curve. This

equilibrium determines the inflation

rate and level of output that prevail in

period t. In the equilibrium shown in

this figure, the short-run equilibrium

level of output Y

t

falls short of the

economy’s natural level of output Y

−

t

.

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aggregate supply curve in that period, which in turn affects output and inflation

in period t + 1, which then affects expected inflation in period t

+ 2, and so on.

These linkages of economic outcomes across time periods will become clear

as we work through a series of examples.