Fig. 1 The Two-Way Relationship Between Output and the Price Level

PriceLevel

RealGDP

Aggregate Demand Curve

Aggregate Supply Curve

AD

Fig. 2 Deriving the Aggregate Demand Curve

140

100

Price Level

K

J

106 Real GDP($ Trillions)

Fig. 3 A Spending Shock Shifts the AD Curve

100

10 15

AD1AD2

EH

Real GDP($ Trillions)

Price Level

Fig. 4a Effects of Key Changes on the Aggregate Demand Curve

(a)

Real GDP

Price Level

P3

Q3 Q1 Q2

AD

P1

P2

Price level ↑ moves us leftward along the AD curve

Price level ↓ moves us rightward along the AD curve

Fig. 4b Effects of Key Changes on the Aggregate Demand Curve

Entire AD curve shifts rightward if:• a, IP, G, or NX increases• Net taxes decrease• The money supply increases

AD2

AD1

(b)

Real GDP

Price Level

AD2

decreases

Fig. 4c Effects of Key Changes on the Aggregate Demand Curve

Entire AD curve shifts leftward if:• a, IP, G, or NX decreases• Net taxes increase• The money supply decreases

(c)

Real GDP

Price Level

AD1

Fig. 5 The Aggregate Supply Curve

Price Level

Real GDP ($ Trillions)

130

100

80C

AS

13.5106

A

B

Starting at point A, an increase in output raises unit costs. Firms raise prices, and the overall price level rises.

Starting at point A, a decrease in output lowers unit costs. Firms cut prices, and the overall price level falls.

Fig. 6 Shifts of the Aggregate Supply Curve

Price Level

Real GDP ($ Trillions)

100

AS1

A

When unit costs rise at any given real GDP, the AS curve shifts upward–e.g., an increase in world oil prices or bad weather for farm production.

140

10

AS2

L

Fig. 7a Effects of Key Changes on the Aggregate Supply Curve

(a)

Real GDP

Price Level

P3

Q2 Q1 Q3

P1

P2

ASReal GDP ↑ moves us rightward along the AS curve

Real GDP ↓ moves us leftward along the AS curve

Fig. 7b Effects of Key Changes on the Aggregate Supply Curve

Real GDP

Price Level(b)

AS1

AS2

Entire AS curve shifts upward if unit costs ↑ for any reason besides an increase in real GDP

Fig. 7c Effects of Key Changes on the Aggregate Supply Curve

Real GDP

Price Level(c)

AS1AS2

Entire AS curve shifts downward if unit costs ↓ for any reason besides an decrease in real GDP

Fig. 8 Short-Run Macroeconomic Equilibrium

Price Level

Real GDP ($ Trillions)

140

100

AS

106 14

E

B

AD

F

Fig. 9 The Effect of a Demand Shock

Price Level

Real GDP($ Trillions)

100

130

AS

1012.5

13.5

E

J

H

AD1

AD2

115

Fig. 10 The Long-Run Adjustment Process

Price Level

Real GDP

P2

P3

P4

P1

YFE Y3 Y2

H

E

AS2

AS1

AD2

AD1

J

K

Fig. 11 Long-Run Adjustment After Negative Demand Shock

Price Level

Real GDP

P2

AS1

P1

P3

YFEY2

AS2

AD2

AD1

E

M

N

Fig. 12 The Long-Run Adjustment Process

Price Level

Real GDPYFE

E

MAD1

AD3

K

Long-Run AS Curve

AD2

Fig. 13 The Effect of Supply Shocks

Price Level

Real GDP

P2

P1

YFEY2

E

AS2

AS1

AD

R

Long-RunAS Curve

AS3

TP2

Y3

Fig. 14a An AD and AS Analysis of Two Recessions

P2

AS1990

P1

YFEY2

Price Level

Real GDP

AD1990

E

R

(a)

AS1991

1. In 1990, a supply shock from higher oil prices shifted the AS curve leftward . . .

2. causing output to fall . . .

3. and the price level to rise.

Fig. 14b An AD and AS Analysis of Two Recessions

YFEY2

AS2000

AD2000

AD2001

ER

(b)4. In 2001, a demand shock from

several factors caused the AD curve to shift leftward . . .

5. causing output to fall . . .

Price Level

Real GDP

P2

P1

6. and the price level to fall.

Fig. 15a/b GDP and the Price Level in Two Recessions

The 1990-91 Recession(b)(a)

140

135

130

120

125

CPI

1989:3 1990:2 1991:1

Year and QuarterYear and Quarter

1989:3 1990:2 1991:1

6.75

6.72

6.66

6.60

6.69

6.63

Rea

l G

DP

($

Tri

llio

ns)

Fig. 15c/d GDP and the Price Level in Two Recessions

(d)

178

176

174

172

2000:1 2001:1

9.35

9.30

9.20

9.10

9.25

9.15

(c)

Year and Quarter

Rea

l G

DP

($

Tri

llio

ns)

2000:1 2001:1Year and Quarter

CPI

The 2001 Recession

Fig. 16 The Average Expansion Versus Two Recent Jobless Expansions

EmploymentIndex

(Trough = 1)

-6 -4 -2 0 +2 +4 +6

Months Before and After the Trough

+8

0.99

1.00

1.01

1.02

1.03

1.04

+10 +12

After Average Recession

After 2001 Recession

After 1991 Recession