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Week 5 · Lecture outline

Week 5 — Lecture Outline · Aggregate Demand & Aggregate Supply

Principles of Macroeconomics · ECON 2 Fall 2026 · Prof. Ashford Fictional sample

Course: Principles of Macroeconomics (ECON 2) · Silver Oak University (fictional sample) · Prof. Ashford
Objective 5 — the AD–AS model & short-run fluctuations; which curve shifts, which direction, what happens to P & Y · SLO A & B
Meeting pattern: two 75-min sessions (≈150 min). Segment minutes below total ~150 — scale to your room.

The deck (E), the tutorial (C), and the workshop (P) all teach from this outline. Every number here is pre-computed and independently verified (see the verified box in §4), and every curve-shift claim follows the NUMBERS_PACK graph-logic canon — Week 5 is that canon's home week.

Week at a glance
Big question Why does the aggregate-demand curve slope down, what's the difference between short-run and long-run aggregate supply, and how do we read off the new price level and real output when a curve shifts?
By week's end students can (1) name the three reasons AD slopes down (wealth, interest-rate, exchange-rate effects) and explain why none of them is the microeconomic substitution story; (2) distinguish SRAS from LRAS; (3) solve a linear AD–AS system for equilibrium P and Y; (4) given a shifter, name which curve moves, which direction, and the resulting change in P and Y; (5) tell a demand-side account of a fluctuation from a supply-side account, evenhandedly.
Key vocabulary aggregate demand (AD), aggregate supply, short-run aggregate supply (SRAS), long-run aggregate supply (LRAS), wealth effect, interest-rate effect, exchange-rate effect, equilibrium price level (P), real output (Y), movement along a curve vs. a shift of a curve, demand shifter, supply shifter, stagflation, potential output
Materials whiteboard; the Week-5 readings/links; Desmos for the AD–AS anchor; an approved chatbot
Timing note 8 segments ≈ 150 min across two sessions. Trim Segment 7 (interaction) if short on time.

Segment 1 — HOOK: "Why did prices AND output move together?" (12 min)

Open with a puzzle: "In a bad year, we sometimes see prices rise and output fall together (a squeeze). In a good year, we often see prices rise and output rise together (a boom). Same direction for prices both times — so what's different?" Let a few guesses land. Then the reframe: "The answer is: it depends on WHICH side of the economy moved — demand or supply. Today you get the single diagram that tells the two apart, and a repeatable four-step reflex you'll use every week for the rest of the term: which curve, which direction, and what happens to price level and output."

Draw the line the whole course pivots on this week: everything from here forward — recessions (Week 6), fiscal policy (Week 7), the Fed (Weeks 9–11), even the inflation-unemployment tradeoff (Week 12) — is a variation on "something shifts a curve in THIS diagram." Master the reflex now.

Segment 2 — PLAIN-LANGUAGE IDEA: two curves, one diagram (16 min)

Teach it in one sentence first, then formalize:

The AD–AS model puts the ENTIRE economy's total spending (aggregate demand) against its total production capacity (aggregate supply) on one graph, with the price level (P) on the vertical axis and real output (Y) on the horizontal axis.

Plain-language build: think of aggregate demand (AD) as "how much everyone — households, firms, government, and foreign buyers — wants to spend in total, at each possible price level," and aggregate supply as "how much the economy's firms are willing and able to produce in total, at each possible price level." Where the two curves cross is the economy's equilibrium — the price level and real output we'd actually observe.

The critical warning, stated now and repeated all week: this LOOKS like the single-market supply-and-demand diagram from microeconomics, but it is a different model answering a different question — it's about the WHOLE economy's total output and the OVERALL price level, not one product's price and quantity. Don't import micro's reasons here without checking they still apply (Segment 3 shows exactly why they don't).

Memory hook: "AD–AS is macro's supply-and-demand — same shape, completely different reasons underneath."

Segment 3 — WHY AD SLOPES DOWN (three macro-specific reasons) (18 min)

AD slopes downward — as the price level falls, the quantity of total output demanded rises (and vice versa) — but NOT for the microeconomic reason (substituting toward a relatively cheaper good). At the level of the WHOLE economy, there's no "other good" to substitute toward. Three genuinely macro-level effects do the work instead — name all three, one line each:

  1. The wealth effect. When the price level falls, the real value of people's cash and savings rises (each dollar buys more) — richer-feeling households spend more, raising the quantity of output demanded.
  2. The interest-rate effect. When the price level falls, people need to hold less money for the same transactions, so some flows into savings, pushing interest rates down — cheaper borrowing raises investment and other interest-sensitive spending.
  3. The exchange-rate effect. When the U.S. price level falls (relative to other countries), U.S. goods become cheaper for foreigners and foreign goods relatively pricier for Americans — net exports rise, raising the quantity of output demanded. (Full mechanics — appreciation/depreciation — come in Week 14; today, just the direction.)

Say it in words (this is the SLO-A habit): "AD slopes down because a lower price level makes people feel wealthier, makes borrowing cheaper, and makes our exports more competitive abroad — three separate channels, all pushing the SAME direction." Misconception to name now: a lower price level is not "cheaper, so people buy more of it instead of something else" (that's the micro substitution story, and it doesn't apply to the price level of literally everything at once).

Segment 4 — WORKED EXAMPLE: solving the AD–AS system & shifting AD right (30 min)

Set it up on the board and do every step out loud.

The anchor scenario. In the fictional economy of Meadowland, this period's aggregate demand is P = 20 − Y/100 and short-run aggregate supply is P = 4 + Y/100 (Y measured in billions of dollars of real output; P is a price-level index).

Step 1 — find equilibrium: set AD equal to SRAS.
20 − Y/100 = 4 + Y/100
20 − 4 = Y/100 + Y/100
16 = 2Y/100
Y = 16 ÷ (2/100) = 16 × 50 = 800

Step 2 — plug Y back into either equation to find P.
P = 20 − 800/100 = 20 − 8 = 12
(Check against SRAS: P = 4 + 800/100 = 4 + 8 = 12 ✓ — both equations agree, so equilibrium is Y* = 800, P* = 12.)

✅ VERIFIED NUMBERS (pre-computed; do not recompute live)

  • Equilibrium: Y* = 800, P* = 12.
  • Government spending rises (a demand shifter) → AD shifts right to P = 22 − Y/100 (SRAS unchanged).
  • New equilibrium: 22 − Y/100 = 4 + Y/100 → 18 = 2Y/100 → Y* = 900; P = 22 − 900/100 = 13.
  • Result: P rose 12 → 13, AND Y rose 800 → 900 — both up, together, exactly as the graph-logic canon requires for an AD-right shift.

Read the graph out loud (walk the shift, step by step):
1. Before: AD and SRAS cross at (Y=800, P=12).
2. The shifter: government spending (a component of AD) rises.
3. The curve that moves: AD — the whole curve shifts to the right (at every price level, more is now demanded). SRAS does not move — nothing here changed firms' costs or capacity.
4. Walk up the (unchanged) SRAS curve to find the new crossing point: Y climbs to 900, and P climbs to 13.
5. In one sentence: "G rises → AD shifts right → we walk up the fixed SRAS curve → P rises from 12 to 13, and Y rises from 800 to 900."

The other three classic AD shifters (state, don't re-derive numerically): a rise in consumption (C) (e.g., a tax cut, rising confidence), a rise in investment (I) (e.g., falling interest rates, optimistic firms), or a rise in net exports (NX) (e.g., a weaker dollar, stronger foreign growth) all shift AD right exactly the same way government spending did — and each one falling shifts AD LEFT, which walks DOWN the SRAS curve: P falls, Y falls, together.

Segment 5 — SRAS vs. LRAS & the supply-side shifters (16 min)

Short-run aggregate supply (SRAS) slopes upward: in the short run, some prices (many wages, some input contracts) are sticky — they don't adjust instantly — so a higher overall price level lets firms' revenue rise faster than their (sticky) costs, making it profitable to produce more. Long-run aggregate supply (LRAS) is drawn as a vertical line at the economy's potential output — the maximum an economy can sustainably produce once ALL prices (including wages) have fully adjusted. LRAS depends on the economy's real resources (labor, capital, technology) — the SAME forces that shift the PPF outward (Week 1) and drive long-run growth (Week 4) — not on the price level.

SRAS shifts LEFT when input costs rise — the classic case is an oil-price shock: firms' costs jump at every level of output, so at any given price level, firms are now willing to supply LESS. Walk the picture: SRAS shifts left → at the (unchanged) AD curve, the new crossing point has a higher P and a LOWER Y — prices rise WHILE output falls, a combination with its own name: stagflation (a genuinely nasty case, because it can't be cured by simply shifting AD in either direction without making one problem worse). SRAS shifts RIGHT when input costs fall or productivity rises (e.g., a technology improvement) — P falls, Y rises, the mirror image. Expected inflation rising is the other classic SRAS-left shifter (workers and firms bake in higher expected prices when negotiating wages and contracts) — named here factually; the full expectations story returns in Week 12.

The single most important habit to drill today: a change in the price level itself is a MOVEMENT ALONG a curve (reading a different point on the SAME AD or SRAS line), while a shifter — something OTHER than P — is what moves the ENTIRE curve to a new position. Mixing these up is the #1 graph-logic error in this course.

Segment 6 — TECHNOLOGY WORKFLOW + AI-CRITIQUE (18 min)

Live demo (Desmos): graph y = 20 - x/100 (AD) and y = 4 + x/100 (SRAS) together (x = Y, y = P). Find the intersection (Desmos will show it, or trace by hand): (800, 12). Then graph y = 22 - x/100 in place of the original AD line and find the new intersection: (900, 13). Point at the visual: the AD line moved bodily rightward; the SRAS line never budged.

AI-critique moment (do this with the class): Ask an approved chatbot: "Aggregate demand is P = 20 − Y/100 and short-run aggregate supply is P = 4 + Y/100. If government spending rises and shifts AD to P = 22 − Y/100, what happens to the price level and real output?" Then audit it together: the right answer is Y rises from 800 to 900, and P rises from 12 to 13 — both up. Chatbots frequently make one of three errors here: shifting SRAS instead of AD, shifting AD the wrong direction (left instead of right for a spending INCREASE), or reporting only one of P or Y changing (both must move together on an AD shift). Make the class name the exact error type if one appears. The habit all term: the tool drafts, you judge.

Segment 7 — INTERACTION: mini-debate (14 min)

Pose two scenarios to the room and split it in half: Group A argues consumer confidence just dropped sharply (a demand-side story); Group B argues a major oil-producing region just had a supply disruption (a supply-side story). Each group has 3 minutes to state: which curve shifts, which direction, and what happens to P and Y — without looking anything up. Target answers: Group A — AD shifts left → P and Y both fall. Group B — SRAS shifts left → P rises, Y falls (stagflation). Debrief: "Notice both scenarios could show up in the SAME headline — 'the economy weakened' — but the RIGHT policy response is completely different depending on which curve moved. That's exactly why economists insist on naming the curve before naming the fix." This directly previews Discussion 5.

Segment 8 — CALLBACKS, TEASE & THE WEEK'S WORK (10 min)

  • Callback: every example today used the SAME four-step reflex — name the shifter → name which curve it moves → name the direction → walk the OTHER (unchanged) curve to read the new P and Y.
  • Tease next week: "Now that you can read a shift, next week we ask: how do we know if the economy is even AT its potential output — and what does it look like when it isn't? Week 6: business cycles and output gaps."
  • The week's work: Lecture Tutorial (why AD slopes down → SRAS vs. LRAS → solving the system → shifting AD → shifting SRAS), Practice (6 reps), Quiz 5, Discussion 5, Assignment 5, and Workshop 5 — "Shift the Right Curve" (the anchor on Desmos, then two qualitative shift scenarios).

Instructor FAQ — common stumbles

  • "Isn't this just microeconomics' supply-and-demand graph again?" No — the AXES are different (the overall price level and total real output, not one product's price and quantity), and the REASONS the curves slope the way they do are different (wealth/interest-rate/exchange-rate effects for AD, not "buy less of the pricier good"). Same visual shape, genuinely different model.
  • "Does a price-level change shift AD or SRAS?" Neither — a change in P is a movement ALONG the existing curve, not a shift. Only something OTHER than P (spending, costs, expectations, resources) shifts a curve.
  • "SRAS vs. LRAS — what's actually different?" SRAS slopes up because some prices are sticky in the short run; LRAS is vertical at potential output because in the long run ALL prices (including wages) have adjusted, so output is set only by real resources and technology — not by the price level.
  • "An oil shock raises prices — so does the economy grow or shrink?" Both effects happen at once but in OPPOSITE directions for output: SRAS shifts left, so P rises AND Y falls simultaneously — that combination (stagflation) is exactly why oil shocks are so painful and hard to fix with one policy tool.
  • "If AD shifts right, does that make the economy 'better'?" That's a normative question in disguise — the model can tell you (positively) that P and Y both rise; whether that's a net improvement depends on how much you weight the higher P (inflation) against the higher Y (more output/jobs) — a genuinely contested weighting, previewed in this week's discussion and returning at full strength in Week 15.
  • "Why doesn't a supply-side story ever produce a boom AND falling prices at once, the way a demand-side story can raise both?" It can — SRAS shifting RIGHT (falling input costs, better technology) gives you exactly that: P falls, Y rises. Students often only remember the LEFT (oil-shock) case; drill both directions.

~ Prof. Ashford's edition · Fall 2026 · built with thecoursemaker.com