29.3 Explaining Economic Trends and Fluctuations

MyEconLab Concept Video

The main purpose of the AS-AD model is to explain business cycle fluctuations in real GDP and the price level. But the model also helps our understanding of economic growth and inflation trends that we’ve studied in earlier chapters. The first step toward explaining economic trends and fluctuations is to combine aggregate supply and aggregate demand and determine macroeconomic equilibrium.

Macroeconomic Equilibrium

Aggregate supply and aggregate demand determine real GDP and the price level. Macroeconomic equilibrium occurs when the quantity of real GDP demanded equals the quantity of real GDP supplied at the point of intersection of the AD curve and the AS curve. Figure ...

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