Economies are complex, but economists have developed models to help people understand how various factors affect the production and consumption of goods and services, possibly contributing to economic growth, inflation, and unemployment. One of the more notable models in macroeconomics is aggregate supply and demand. At this point, you should already understand how these individual parts of the model work: aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS). In this module, we put it all together and allow you to shift curves and analyze the larger economic effects.

After completing this module, you will be able to

• define long-run equilibrium;
• define potential output;
• define economic shock;
• identify the components of aggregate demand and aggregate supply;
• identify economic scenarios that could cause economic shocks;
• identify the effects of short-run fluctuations, such as negative or positive demand shocks;
• identify a recessionary gap and an inflationary gap; and
• analyze the effects that economic shocks have on an economy’s short-run and long-run output, price level, and unemployment.