I. Describe how fluctuations in aggregate demand and aggregate supply cause short-run changes in the economy and the business cycle

Question 1

SR disequilibrium where P2>P1

Answer 1

Excess supply: (in macroeconomic equilibrium terms) The Q of real goods and services supplied exceeds the AggD for real goods and services; Recessionary gap; downward pressure on prices

Effect on businss: A buildup of inventories, a decrease in production and prices > decrease in Plevel which moves econ back to P1

Question 2

SR Disequilibrium where P1>P0

Answer 2

Excess demand for goods and services; inflationary gap; Business experiences unintended decreases in inventories, so they increase output and prices . As Plevel increases, econ moves toward LRAgg.D equilibrium.