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Learning Basic Macroeconomics by Hal W. Snarr

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CHAPTER 4

The Aggregate Market Model

The aggregate market model combines aggregate demand (AD) with aggregate supply (AS), which has short-run and long-run components. Short-run aggregate supply (SRAS) is the relationship between the price level (PL) and real gross domestic product (GDP) supplied, holding all other production plans constant. Long-run aggregate supply (LRAS) is the value of potential output (Yp) in the short run. While SRAS and AD determine the PL and real GDP, the gap between real GDP and potential output determines the unemployment rate.

Simulated Aggregate Demand

In the previous chapter, AD was traced out by observing real GDP decline after an increase in the PL shifted the AE line down along the 45-degree line. The AE model ...

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