Worth: Mankiw Economics 5e 248 PART IV Business Cycle Theory: The Economy in the Short Run 7 Prce level p Shifts in Aggregate Demand in he short run a reduction in the money supply shifts the aggregate downward from AD, to AD2 The equilibrium for the economy oves from point A to point B Since the aggregate supply curve sRAs is horizontal in the short run,the reduction in aggregate demand reduces the level of o 1. In the ort run when pnces AD wers the How does the economy make the transition from the short run to the long run? Let's trace the effects over time of a fall in aggregate demand. Suppose that che economy is initially in long-run equilibrium, as shown in Figure 9-8. In this figure, there are three curves: the aggregate demand curve, the long-run aggre gate supply curve, and the short-run aggregate supply curve. The long-run equi- librium is the point at which aggregate demand crosses the long-run aggregate supply curve. Prices have adjusted to reach this equilibrium. Therefore, when the fi gure Price level. p Long-Run Equilibrium In the LRAS long run, the economy finds itself at the intersection of the long run aggregate supply curve and the aggregate demand curve Because prices have adjusted to this level, the short-run aggregat supply curve crosses this point AD Income, output, Y User JoENA: Job EFFo1425: 6264_ch09: Pg 248: 27140#/eps at 100s wed,Feb13,200210:084User JOEWA:Job EFF01425:6264_ch09:Pg 248:27140#/eps at 100% *27140* Wed, Feb 13, 2002 10:08 AM How does the economy make the transition from the short run to the long run? Let’s trace the effects over time of a fall in aggregate demand. Suppose that the economy is initially in long-run equilibrium, as shown in Figure 9-8. In this figure, there are three curves: the aggregate demand curve, the long-run aggre￾gate supply curve, and the short-run aggregate supply curve.The long-run equi￾librium is the point at which aggregate demand crosses the long-run aggregate supply curve. Prices have adjusted to reach this equilibrium.Therefore, when the 248 | PART IV Business Cycle Theory: The Economy in the Short Run figure 9-7 Price level, P Income, output, Y 3. . . . lowers the level of output. 2. . . . a fall in aggregate demand . . . AD1 AD2 B A SRAS 1. In the short run when prices are sticky. . . Shifts in Aggregate Demand in the Short Run A reduction in the money supply shifts the aggregate demand curve downward from AD1 to AD2. The equilibrium for the economy moves from point A to point B. Since the aggregate supply curve is horizontal in the short run, the reduction in aggregate demand reduces the level of output. figure 9-8 Price level, P Income, output, Y AD Y SRAS LRAS Long-run equilibrium Long-Run Equilibrium In the long run, the economy finds itself at the intersection of the long￾run aggregate supply curve and the aggregate demand curve. Because prices have adjusted to this level, the short-run aggregate supply curve crosses this point as well