Summary
The chapter on aggregate demand and supply analysis outlines how the equilibrium level of output and inflation is determined by the interaction between the AD and AS curves. A variety of factors, including monetary policy, government spending, taxes, and external shocks, can shift these curves. In the short run, shifts in these curves can cause mismatches between actual and potential output, but the self-correcting mechanism eventually restores output to potential. The analysis is critical for understanding historical economic events (e.g., the Volcker disinflation and the 2007–2009 crisis) and for predicting the effects of future economic policies and shocks.