Unit 3: National Income and Price Determination

Unit 3 builds the AD-AS model. Aggregate demand slopes down because of the wealth, interest rate, and exchange rate effects, and shifts with changes in C, I, G, or net exports, amplified by the spending and tax multipliers. Short-run aggregate supply shifts with input prices, productivity, and expectations, while long-run aggregate supply is vertical at full-employment output. Practice reading recessionary and inflationary gaps, demand-pull vs. cost-push inflation, stagflation, how the economy self-adjusts through wages in the long run, and how fiscal policy and automatic stabilizers can close gaps.