THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 659

CHAPTER 24

TA B L E 2 4 - 2

Aggregate Demand and Supply Analysis

627

Factors That Shift the Short-Run Aggregate Supply Curve

Factor

Shifts in the
Short-Run Aggregate
Supply Curve

Factor

Shifts in the
Short-Run Aggregate
Supply Curve

Y * Yn

P

Wage push

P

Y + Yn

P

Y
AS1
AS2

Positive supply shock

P

Y
AS1
AS2

Rise in expected
price level

P

Y
AS2
AS1

Negative supply shock

P

Y
AS2

AS1

AS2
AS1

Y

AS2
AS1

Y

EQ UI LI BRI U M IN AG GRE G AT E SU P PLY
AND D EM AN D ANA LYSIS
The equilibrium level of aggregate output and the price level will occur at the
point where the quantity of aggregate output demanded equals the quantity of
aggregate output supplied. However, in the context of aggregate supply and
demand analysis, there are two types of equilibrium: short-run and long-run.

Equilibrium in
the Short Run

Figure 24-4 illustrates a short-run equilibrium in which the quantity of aggregate
output demanded equals the quantity of output supplied, that is, where the aggregate demand curve AD and the short-run aggregate supply curve AS intersect at
point E. The equilibrium level of aggregate output equals Y *, and the equilibrium
price level equals P *.
As in our earlier supply and demand analyses, equilibrium is a useful concept
only if there is a tendency for the economy to head toward it. We can see that the
economy heads toward the equilibrium at point E by first looking at what happens
when we are at a price level above the equilibrium price level P *. If the price level

is at P", the quantity of aggregate output supplied at point D is greater than the
quantity of aggregate output demanded at point A. Because people want to sell
more goods and services than others want to buy (a condition of excess supply),
the prices of goods and services will fall, and the aggregate price level will drop.
This decline in the price level will continue until it has reached its equilibrium level
of P * at point E.