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MARKET-CLEARING PRICE: The price that exists when a market is clear of shortage and surplus, or is in equilibrium. Market-clear price is a common, non-technical term for equilibrium price. In a market graph, the market-clearing price is found at the intersection of the demand curve and the supply curve.

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Lesson 16: Aggregate Shocks | Unit 4: Complex Shifts Page: 14 of 21

Topic: AD Increase <=PAGE BACK | PAGE NEXT=>

The case of an increase in the AD curve. Let's start at long-run equilibrium. All three curves, AD, LRAS, and SRAS, intersect at the same long-run equilibrium values, Po and Qf.
  • With a rightward shift of the AD curve, the aggregate market achieves short-run equilibrium at a higher price level and more real production.
  • The labor market imbalance causes wages and production cost to rise. The SRAS shifts leftward. It stops shifting when it intersects the new AD and the original LRAS curves for a new long-run equilibrium. The price level is even higher and real production returns to full employment.

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AGGREGATE DEMAND INCREASE, SHORT-RUN AGGREGATE MARKET

A shock to the short-run aggregate market caused by an increase in aggregate demand, resulting in and illustrated by a rightward shift of the aggregate demand curve. An increase in aggregate demand in the short-run aggregate market results in an increase in the price level and an increase in real production. The level of real production resulting from the shock can be greater or less than full-employment real production.

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