We’ve covered a lot in this chapter, but the basic point is that we have used the model of aggregate demand and supply to analyze business fluctuations, fluctations in the growth rate of real GDP.

Using our model, we laid out how to analyze two types of shocks, real shocks and aggregate demand shocks. Real shocks are analyzed through shifts in the LRAS curve. Aggregate demand shocks are analyzed using shifts in the AD curve.

When you combine the aggregate demand curve, long-run aggregate supply curve, and short-run aggregate supply curve into a single diagram, you can analyze a wide variety of economic scenarios and how they affect the growth rate of the economy. As you will see in future chapters, our model will also help us to explain when government policy can and cannot be used to successfully smooth business fluctuations.

For reasons outlined in the chapter, the aggregate demand curve slopes downward and the short-run aggregate supply curve slopes upward. We also showed how the aggregate demand curve can be broken down into changes in and . In addition, changes in can be broken down into changes in , , , or . You should know and understand how nominal wage and price confusion, sticky wages, sticky prices, menu costs, and uncertainty create an upward-sloped short-run aggregate supply curve.

We outlined the history of America’s Great Depression from the 1930s using our model. The Great Depression resulted from an unfortunate, concentrated, and interrelated series of aggregate demand and real shocks.

The material in this chapter is central to macroeconomics. If you understand where these curves come from and how to shift them, you will have a basic toolbox for many macroeconomic questions. You are now ready to tackle many of the core topics of macroeconomics and business cycles.

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