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AS-AD Equilibrium in Short, Medium Run

short run - behaves simply, equilibrium at intersection of 2 curves  

  • natural level of output (Yn) doesn't come into play in short run
  • equilibrium at instantaneous intersection of AS and AD relations

medium run - shift back to natural level of production  

  • over time, AS adjusts to go back to natural level of output
  • in this case, output too high >> price higher than expected price
  • firms will raise their expected price over time, until AS relation shifts to where the intersection is at Yn

 

  • in this case, output too low >> price lower than expected
  • firms will lower their expected price until AS relation shifts down to where intersection is at Yn
  • important to note that change expected price doesn't shift the AD relation
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