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 Y_n

• 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 Y_n
• important to note that change expected price doesn't shift the AD relation

adjusting - over time, equilibrium shifts back to natural level of output  

• increase in real money stock (M)
• no M component in AS (no shift in short run)
• increase in M >> shifts AD to the right
• must go back to natural level of output >> AS shifts up until intersection at Yn again
• by equation Y = Y(M/P, G, T), increase in M results in a proportional increase in P of equal magnitude (over time, Y would be constant)

• neutrality of money - changing nominal money only affects change in price level
  • in medium run, output and interest rate stays constant
• cannot sustain changes in output (only temporary)
  • shock - changes to the economy in short run
  • propagation mechanism - how economy shifts after a shock (mostly in recovering the natural order of things)
• M/P = Y L(i)
  • to keep Y, i constant, P proportionally increases by whatever amount M increases

• decrease in deficit (less G)
• AS curve not shifting in short run
• less G >> AD relation shifts to the left
• AS curve shifts down in medium run to restore Y_n
• unlike w/ M, changes in G affect the interest rate

• taking Y_n = C(Y_n-T) + I(Y_n,i) + G:
  • in medium run, Y stays constant
  • so change in G must be balanced by change in interest i (the only thing left that can change)
  • unlike money market, has no P component to take away need for change in interest
• w/ G decrease, I (investment) must increase >> interest decreases

aggregate demand - relates the equilibrium from the IS-LM model, but w/o interest  

• Y = C(Y-T) + I(Y,i) + G
• M/P = Y L(i)
• downward sloping relation
  • decrease in output >> demand decrease >> interest increases >> real money (M/P) decreases >> price increases as M stays constant
  • variables shifts IS or LM curve >> variable will shift AD relation

• essentially eliminates interest from IS-LM and re-plots by using the shifts caused by price changes
  • algebraically, solve both IS and LM in terms of interest to eliminate that component
• for price change to P' from P, interest rate rises (while real money M/P decreases)
• price change doesn't shift IS curve
• Y = Y(M/P, G, T)
  • output increases w/ money supply, gov't spending
  • decreases w/ price level, taxes

aggregate supply - shows effects of output on price level  

• W = P^eF(u,z)
• P = (1+m)W = (1+m)P^eF(u,z)
• u = (L-N)/L
  • N = employment, L = labor force
  • Y=N >> u = (L-Y)/L = 1 - Y/L
• P = (1+m)P^e F(1-Y/L,z)
  • increase in output >> employment increase >> lower unemployment >> nominal wage increase >> increased price level
  • increase in expected price >> nominal wage increase >> increased price level
• upward sloping (output directly related to price level)

• at Y_n, P=P^e
  • price equal expected price when output at natural level of output
• greater than natural level of output >> price level greater than expected (P > P^e)
• lower than natural level of output >> price level lesser than expected (P < P^e)

• changes in expected price level don't affect the natural level of output
• increase expected price level >> shift AS relation up
• decrease expected price level >> shift AS relation down