9.0 Introduction

This may be the most important module in the Principles of Macroeconomics course. The module introduces the key macroeconomic model, the aggregate demand-aggregate supply model, that will be used in nearly every following module. Studying this module will be like learning how to cut and join wood for a carpenter, working with pipes for a plumber, or writing code for a programmer. In short, macroeconomics is all about using a model like AD-AS to analyze issues and problems in the macroeconomy. The effort you put into learning this module will be time well spent.

The AD-AS model shows how spending in the economy ([latex]\text{AD}[/latex]) interacts with production ([latex]\text{AS}[/latex]) to determine the aggregate price level and the level of real GDP. The model works like an ordinary market demand and supply model, but you will see that the way it is interpreted is quite different.