1. Economies experience short-run fluctuations in economic activity, measured most broadly by real GDP. These fluctuations (business cycles) are evident in many macroeconomic variables. In particular, when GDP growth declines, the unemployment rate rises above its natural rate. Some economists look at various leading indicators in an attempt to predict these fluctuations.

  2. The crucial difference between how the economy works in the long run and how it works in the short run is that prices are flexible in the long run but sticky in the short run. The model of aggregate supply and aggregate demand provides a framework to analyze economic fluctuations and see how the impact of policies varies over different time horizons.

  3. The aggregate demand curve slopes downward. It tells us that the lower the price level, the greater the aggregate quantity of goods and services demanded.

  4. In the long run, the aggregate supply curve is vertical because output is determined by the amounts of capital and labour and by the available technology, but not by the level of prices. Therefore, shifts in aggregate demand affect the price level but not output or employment.

  5. In the short run, the aggregate supply curve is horizontal, because wages and prices are sticky at predetermined levels. Therefore, shifts in aggregate demand affect output and employment.

  6. Shocks to aggregate demand and aggregate supply cause economic fluctuations. Because the Bank of Canada can shift the aggregate demand curve, it can attempt to offset these shocks to maintain output and employment at their natural levels.