This chapter introduced a framework to study economic fluctuations: the model of aggregate supply and aggregate demand. The model is built on the assumption that prices are sticky in the short run and flexible in the long run. It shows how shocks to the economy cause output to deviate temporarily from the level implied by the classical model.

The model also highlights the role of monetary policy. On the one hand, poor monetary policy can be a source of destabilizing shocks to the economy. On the other hand, a well-run monetary policy can respond to shocks and stabilize the economy.

In the chapters that follow, we refine our understanding of this model and our analysis of stabilization policy. Chapter 11, Chapter 12 and Chapter 13 go beyond the quantity equation to refine our theory of aggregate demand. Chapter 14 examines aggregate supply in more detail. The remainder of the book then uses this model as the platform from which to dive into more advanced topics in macroeconomic theory and policy.