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Complete AS-AD Model

Unlike the aggregate demand curve, the aggregate supply curve does not usually shift independently.
This is because the equation for the aggregate supply curve contains no terms that are indirectly
related to either the price level or output. Instead, the equation for aggregate supply contains only
terms derived from the AS-AD model. For this reason, to understand how the aggregate supply curve
shifts, we must work from the AS-AD model as a whole.

Figure %: Graph of the AS-AD model


depicts the AS-AD model. The intersection of the short-run aggregate supply curve, the long-run
aggregate supply curve, and the aggregate demand curve gives the equilibrium price level and the
equilibrium level of output. This is the starting point for all problems dealing with the AS- AD model.
Shifts in Aggregate Demand in the AS-AD Model
The primary cause of shifts in the economy is aggregate demand. Recall that aggregate demand can be
affected by consumers both domestic and foreign, the Fed, and the government. For a review of the
shifters of aggregate demand, see the SparkNote on aggregate demand. In general, any expansionary
policy shifts the aggregate demand curve to the right while any contractionary policy shifts the
aggregate demand curve to the left. In the long run, though, since long-term aggregate supply is fixed
by the factors of production, short-term aggregate supply shifts to the left so that the only effect of a
change in aggregate demand is a change in the price level.

Figure %: Graph of an expansionary shift in the AS-AD model.


Let's work through an example. For this example, refer to . Notice that we begin at point A where shortrun aggregate supply curve 1 meets the long-run aggregate supply curve and aggregate demand curve
1. The point where the short-run aggregate supply curve and the aggregate demand curve meet is
always the short-run equilibrium. The point where the long-run aggregate supply curve and the
aggregate demand curve meet is always the long-run equilibrium. Thus, we are in long-run equilibrium
to begin.
Now say that the Fed pursues expansionary monetary policy. In this case, the aggregate demand curve
shifts to the right from aggregate demand curve 1 to aggregate demand curve 2. The intersection of
short- run aggregate supply curve 1 and aggregate demand curve 2 has now shifted to the upper right
from point A to point B. At point B, both output and the price level have increased. This is the new
short-run equilibrium.
But, as we move to the long run, the expected price level comes into line with the actual price level as
firms, producers, and workers adjust their expectations. When this occurs, the short-run aggregate
supply curve shifts along the aggregate demand curve until the long-run aggregate supply curve, the
short-run aggregate supply curve, and the aggregate demand curve all intersect. This is represented by
point C and is the new equilibrium where short-run aggregate supply curve 2 equals the long-run
aggregate supply curve and aggregate demand curve 2. Thus, expansionary policy causes output and
the price level to increase in the short run, but only the price level to increase in the long run.

Figure %: Graph of a contractionary shift in the AS- AD model

The opposite case exists when the aggregate demand curve shifts left. For example, say the Fed
pursues contractionary monetary policy. For this example, refer to . Notice that we begin again at point
A where short-run aggregate supply curve 1 meets the long-run aggregate supply curve and aggregate
demand curve 1. We are in long-run equilibrium to begin.
If the Fed pursues contractionary monetary policy, the aggregate demand curve shifts to the left from
aggregate demand curve 1 to aggregate demand curve 2. The intersection of short-run aggregate
supply curve 1 and the aggregate demand curve has now shifted to the lower left from point A to point
B. At point B, both output and the price level have decreased. This is the new short-run equilibrium.
But, as we move to the long run, the expected price level comes into line with the actual price level as
firms, producers, and workers adjust their expectations. When this occurs, the short-run aggregate
supply curve shifts down along the aggregate demand curve until the long-run aggregate supply curve,
the short-run aggregate supply curve, and the aggregate demand curve all intersect. This is
represented by point C and is the new equilibrium where short-run aggregate supply curve 2 meets the
long-run aggregate supply curve and aggregate demand curve 2. Thus, contractionary policy causes
output and the price level to decrease in the short run, but only the price level to decrease in the long
run.
This is the logic that is applied to all shifts in aggregate demand. The long-run equilibrium is always
dictated by the intersection of the vertical long-run aggregate supply curve and the aggregate demand
curve. The short-run equilibrium is always dictated by the intersection of the short-run aggregate
supply curve and the aggregate demand curve. When the aggregate demand curve shifts, the economy
always shifts from the long-run equilibrium to the short-run equilibrium and then back to a new long-run
equilibrium. By keeping these rules and the examples above in mind it is possible to interpret the
effects of any aggregate demand shift in both the short run and in the long run.
Shifts in the short-run aggregate supply curve are much rarer than shifts in the aggregate demand
curve. Usually, the short-run aggregate supply curve only shifts in response to the aggregate demand
curve. But, when a supply shock occurs, the short-run aggregate supply curve shifts without prompting
from the aggregate demand curve. Fortunately, the correction process is exactly the same for a shift in
the short-run aggregate supply curve as it is for a shift in the aggregate demand curve. That is, when
the short-run aggregate supply curve shifts, a short- run equilibrium exists where the short-run
aggregate supply curve intersects the aggregate demand curve. Then the aggregate demand curve
shifts along the short-run aggregate supply curve until the aggregate demand curve intersects both the
short-run and the long-run aggregate supply curves. Once the economy reaches this new long-run
equilibrium, the price level is changed but output is not.
There are two types of supply shocks. Adverse supply shocks include things like increases in oil prices,
a drought that destroys crops, and aggressive union actions. In general, adverse supply shocks cause
the price level for a given amount of output to increase. This is represented by a shift of the short-run
aggregate supply curve to the left. Positive supply shocks include things like decreases in oil prices or
an unexpected great crop season. In general, positive supply shocks cause the price level for a given
amount of output to decrease. This is represented by a shift of the short-run aggregate supply curve to
the right.

Figure %: Graph of a positive supply shock in the AS- AD model

Let's work through an example. For this example, refer to . Notice that we begin at point A where shortrun aggregate supply curve 1 meets the long-run aggregate supply curve and aggregate demand curve
1. Thus, we are in long-run equilibrium to begin.
Now say that a positive supply shock occurs: a reduction in the price of oil. In this case, the short-run
aggregate supply curve shifts to the right from short-run aggregate supply curve 1 to short-run
aggregate supply curve 2. The intersection of short- run aggregate supply curve 2 and aggregate
demand curve 1 has now shifted to the lower right from point A to point B. At point B, output has
increased and the price level has decreased. This is the new short-run equilibrium.
However, as we move to the long run, aggregate demand adjusts to the new price level and output
level. When this occurs, the aggregate demand curve shifts along the short-run aggregate supply curve
until the long-run aggregate supply curve, the short-run aggregate supply curve, and the aggregate
demand curve all intersect. This is represented by point C and is the new equilibrium where short-run
aggregate supply curve 2 equals the long-run aggregate supply curve and aggregate demand curve 2.
Thus, a positive supply shock causes output to increase and the price level to decrease in the short run,
but only the price level to decrease in the long run.

Figure %: Graph of an adverse supply shock in the AS- AD model


Let's work through another example. For this example, refer to . Notice that we begin at point A where
short-run aggregate supply curve 1 meets the long run aggregate supply curve and aggregate demand
curve 1. Thus, we are in long-run equilibrium to begin.
Now say that an adverse supply shock occurs: a terrifying increase in the price of oil. In this case, the
short-run aggregate supply curve shifts to the left from short-run aggregate supply curve 1 to short-run
aggregate supply curve 2. The intersection of short-run aggregate supply curve 2 and aggregate
demand curve 1 has now shifted to the upper left from point A to point B. At point B, output has
decreased and the price level has increased. This condition is called stagflation. This is also the new
short- run equilibrium.
However, as we move to the long run, aggregate demand adjusts to the new price level and output
level. When this occurs, the aggregate demand curve shifts along the short-run aggregate supply curve
until the long-run aggregate supply curve, the short-run aggregate supply curve, and the aggregate
demand curve all intersect. This is represented by point C and is the new equilibrium where short-run
aggregate supply curve 2 equals the long-run aggregate supply curve and aggregate demand curve 2.
Thus, an adverse supply shock causes output to decrease and the price level to increase in the short
run, but only the price level to increase in the long run.
This is the logic that is applied to all shifts in short-run aggregate supply. The long-run equilibrium is
always dictated by the intersection of the vertical long run aggregate supply curve and the aggregate
demand curve. The short-run equilibrium is always dictated by the intersection of the short-run
aggregate supply curve and the aggregate demand curve. When the short-run aggregate supply curve
shifts, the economy always shifts from the long-run equilibrium to the short-run equilibrium and then
back to a new long-run equilibrium. By keeping these rules and the examples above in mind, it is
possible to interpret the effects of any short-run aggregate supply shift, or supply shock, in both the
short run and in the long run.

This section has served a number of purposes. First, we covered how and why the short-run aggregate
supply curve shifts. Second, we reviewed how and why the aggregate demand curve shifts. Third, we
introduced the mechanism that moves the economy from the long run to the short run and back to the
long run when there is a change in either aggregate supply or aggregate demand. At this stage, you
have the ability to use the highly realistic model of the macroeconomy provided by the AS-AD diagram
to analyze the effects of macroeconomic policies. This will prove to be the most powerful tool in your
collection for understanding the macroeconomy. Use it wisely!
http://www.sparknotes.com/economics/macro/aggregatesupply/section3/page/3/
Aggregate expenditures and price are inversely related. A rise in price level will cause a decrease in
aggregate expenditures and a decrease in price level will cause an increase in aggregate expenditures.
There are three things that explain why falling price levels increase aggregate expenditures. They are:

The Wealth Effect: This says that a rise in the price level will make people who have money and
other financial assets feel poorer. They then buy less, and the opposite is true if the price level
were to fall- people would buy more. If people feel poorer and since consumption is a part of AD,
then aggregate expenditures will decrease, thus decreasing the quantity demanded.

The International Effect: This states that as the price of our goods go up -and become more
expensive to foreigners- net exports will fall. In addition, imports will increase because foreign
goods will seem cheaper than the goods at home whose prices have risen. Since net exports will
fall and this is a part of AD, then overall aggregate expenditures will decrease.

The Interest Rate Effect: This says that as price increases, interest rates will increase causing
investments to decrease. If prices are higher, then people will have less money because they
will be forced to spend more. If interest rates are higher, people will be less willing to put what
little money they have into investments. Since Investments are part of the aggregate demand,
the quantity of aggregate expenditures will go down, showing a negative relationship between
price and aggregate expenditures. http://www.econport.org/content/handbook/ADandS.html

http://www.tradingeconomics.com/philippines/inflation-cpi
http://www.tradingeconomics.com/philippines/unemployment-rate

Unemployment Rate in Philippines increased to 6.50 percent in the third quarter of 2015
from 6.40 percent in the second quarter of 2015. Unemployment Rate in Philippines
averaged 8.82 percent from 1994 until 2015, reaching an all-time high of 13.90 percent
in the first quarter of 2000 and a record low of 6 percent in the fourth quarter of 2014.
Unemployment Rate in Philippines is reported by the National Statistics Office of
Philippines.

Actual

Previous

Highest

Lowest

Dates

Unit

Frequency

6.50

6.40

13.90

6.00

1994 - 2015

percent

Quarterly

In Philippines, the unemployment rate measures the number of people actively looking
for a job as a percentage of the labour force. This page provides - Philippines
Unemployment Rate - actual values, historical data, forecast, chart, statistics, economic
calendar and news. Philippines Unemployment Rate - actual data, historical chart and
calendar of releases - was last updated on December of 2015.

Philippines unemployment rate was at 6.5 percent in July of 2015, down from 6.7
percent a year earlier but up from 6.4 percent reported in April 2015. The figure
excludes Lette Region.
There were 2,724 thousand unemployed persons. Among the unemployed persons, 62.1
percent were males. The age group 15 to 24 years comprised 50.4 percent, while the age
group 25 to 34, 29.5 percent. By educational attainment, 22.2 percent of the
unemployed were college graduates, 13.5 percent were college undergraduates, and 33.2
percent were high school graduates.
Meanwhile, the number of underemployed was 8,219 in July. More than 50 percent
worked for less than 40 hours a week and 38.3 percent worked in the agriculture sector,
while 44.2 percent were in the services sector. Those in the industry sector accounted for
17.6 percent.
In July of 2015, there were 39,174 thousand employed persons. 55.5 percent worked in
the services sector, 28.0 percent in agriculture and the remaining 16.5 percent in
industry.
The labour force participation rate fell to 63.0 percent from 64.4 percent a year ago.
Philippines Labour

Last

Previous

Highest

Lowest

Unit

Unemployment Rate

6.50

6.40

13.90

6.00

percent

Employed Persons

39174.00 39159.00 39174.00 18567.00 Thousand

[+]

Unemployed Persons

2724.00

Labor Force Participation Rate 62.90

[+]

2681.00

4989.00

1720.00 Thousand

[+]

64.60

94.70

62.90

[+]

percent

Job Vacancies

199942.00 199942.00 290741.00 3036.00

[+]

Wages

8280.00

7995.00

8280.00

5798.00 PHP/Month [+]

Wages in Manufacturing

1367.08

1455.97

1455.97

638.86

Index Points [+]

Population

100.10

98.80

100.10

26.27

Million

[+]

Employment Rate

93.50

93.60

94.00

85.60

percent

[+]

Philippines annual inflation rate unexpectedly rose 1.1 percent in November of 2015,
following a 0.4 percent increase in the previous month and above market expectations. It
is the highest figure since June, mainly due to a faster increase in cost of food and nonalcoholic beverages and transport while cost of housing and utilities decline at a slower
pace. Inflation Rate in Philippines averaged 8.71 percent from 1958 until 2015, reaching
an all-time high of 62.80 percent in September of 1984 and a record low of -2.10 percent
in January of 1959. Inflation Rate in Philippines is reported by the National Statistics
Office of Philippines.

Actual

Previous

Highest

Lowest

Dates

Unit

Frequency

1.10

0.40

62.80

-2.10

1958 - 2015

percent

Monthly

In Philippines, the most important categories in the Consumer Price Index are:
food and non-alcoholic beverages (39 percent of total weight); housing, water, electricity,
gas and other fuels (22 percent) and transport (8 percent). The index also includes
health (3 percent), education (3 percent), clothing and footwear (3 percent),
communication (2 percent) and recreation and culture (2 percent). Alcoholic beverages,
tobacco, furnishing, household equipment, restaurants and other goods and services
account for the remaining 15 percent. This page provides the latest reported value for Philippines Inflation Rate - plus previous releases, historical high and low, short-term
forecast and long-term prediction, economic calendar, survey consensus and news.
Philippines Inflation Rate - actual data, historical chart and calendar of releases - was
last
updated
on
December
of
2015.
Philippines annual inflation rate unexpectedly rose 1.1 percent in November of
2015, following a 0.4 percent increase in the previous month and above market
expectations. It is the highest figure since June, mainly due to a faster increase in
cost of food and non-alcoholic beverages and transport while cost of housing and
utilities decline at a slower pace.
Year-on-year, prices rose for: alcoholic beverages and tobacco (+3.9 percent in November
from +3.7 percent in October); clothing and footwear (+2.3 percent from +2.2 percent);
furnishing, household equipment and routine maintenance (+1.6 percent from +1.5
percent); health (+1.8 percent from +1.7 percent); transport (+0.6 percent from
+0.1percent); recreation and culture (+1.0 percent from +0.9 percent) and restaurant
and miscellaneous goods and services (+1.4 percent from +1.2 percent). Prices of
heavily-weighted food and non-alcoholic beverages also increased 1.7 percent from a 0.7
percent rise in the previous month. In contrast, prices declined for housing, water,

electricity, gas and other fuels (-1.2 percent from -2.1 percent). while prices remained
unchanged for communication, cost was steady for education (+3.6 percent).
From January to November 2015, inflation was 1.4 percent, below the central bank's
target range of 2.0 percent to 4.0 percent for this year.
Core inflation was recorded at 1.8 percent year-on-year in November, up from 1.5 percent
in October.
On a monthly basis, consumer prices increased by 0.8 percent, following a 0.1 percent
rise in September. It is the highest figure since January. Prices rose for : food and nonalcoholic beverages (+1.0 percent); alcoholic beverages and tobacco (+0.9 percent);
clothing and footwear (+0.3 percent); housing, water, electricity, gas and other fuels (+0.1
percent); recreation and culture (+0.2 percent) and restaurant and miscellaneous goods
and services (+0.3 percent). While prices steady for health (+0.2 percent), cost remained
unchanged for communication and education.

Philippines Prices

Last

Previous

Highest

Lowest

Unit

Inflation Rate

1.10

0.40

62.80

-2.10

percent

[+]

Inflation Rate Mom

0.50

0.10

9.00

-4.60

percent

[+]

Consumer Price Index CPI

141.60

141.40

141.70

1.30

Index Points

[+]

Core Consumer Prices

137.70

137.60

137.80

75.20

Index Points

[+]

Core Inflation Rate

1.80

1.50

7.25

1.40

percent

[+]

GDP Deflator

175.07

170.93

184.73

12.87

Index Points

[+]

Producer Prices

140.00

139.00

180.70

81.10

Index Points

[+]

Producer Prices Change

-8.08

-7.88

17.50

-10.00

percent

[+]

Export Prices

102.01

108.74

133.52

8.57

Price Index

[+]

Food Inflation

1.70

0.80

17.29

-0.78

percent

[+]

Import Prices

111.73

115.81

138.30

11.46

Price Index

[+]