1. The main variables used in macroeconomics are output, price level, unemployment, and interest rates. Changes in these variables are interrelated in various ways.

A. The AD/AS model is central to macroeconomic analysis. This model describes changes in the economy in terms of the price level and output (RGDP).

I. Consider an economy that is in short-run disequilibrium, with output well below the full-employment level. Describe how that economy would return to long-run equilibrium. Use graphs to explain your answer.

II. Explain how supply shocks and demand shocks affect the AD/AS model.