AD-AS Adjustment

Here is how the economy adjusts from one long run equilibrium to another in the dynamic AD-AS model in Cowen & Tabarrok, Modern Principles: Macroeconomics. Basically:

1. There's a change in the money growth rate that shifts the aggregate demand curve by increasing spending growth.

2. In the short run, wages and prices are sticky. Output growth and inflation both rise as we move along the short-run aggregate supply curve.

3. In the long run, wages and prices are flexible. People adjust their expectations and the economy moves back to its long-run potential.