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 PL and real GDP supplied, holding all other production plans constant in the short run. 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 unemployment.
Simulated AD
In the final section of Chapter 3, AD was derived graphically and algebraically from AE in two thought experiments. In both of these experiments, all AE factors but PL were held constant at their assumed initial ...
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