Abstract

The interrelations between aggregate demand, aggregate supply and the role of price adjustment were investigated as a powerful economic tool for the macroeconomic equilibrium. An assumption was made, that if the aggregate demand is not equal to the aggregate supply, the price level begins to change in order to restore the equilibrium, however with a time lag. The Phillips Curve elucidates this adjustment process. A special attention was paid to the supply shocks by analyzing the real business cycle models and the Phillips Curve. Both models predict recession, combined with inflation and unemployment. This phenomenon is known as stagflation.