AD/AS Model -

AD/AS Model - 

• ADAS - The equilibrium of AS and AD determines current output (GDPr) and the price level (PL)

• Full Employment - Full employment equilibrium exists where AD intersects SRAS & LRAS at the same point

• Recessionary Gap - Exists when equilibrium occurs below full employment output

• Inflationary Gap - Exists when equilibrium occurs beyond full employment output

• Changes in AD
• u = Unemployment
• pi = Inflation

▲in AD: 

• ▲Consumption (C)
• C↑ ∴ AD → ∴ GDPR↑ and PL↑ ∴ u%↓ and π%↑
• C↓ ∴ AD ← ∴ GDPR↓ and PL↓ ∴ u%↑ and π%↓
• ▲ Gross Private Investment (Ig)
• Ig↑ ∴ AD → ∴ GDPR↑ and PL↑ ∴ u%↓ and π%↑
• Ig↓ ∴ AD ← ∴ GDPR↓ and PL ↓ ∴ u%↑ and π%↓
• ▲Government Spending (G)
• G↑ ∴ AD→ ∴ GDPR↑ and PL↑ ∴ u%↓ and π%↑
• G↓ ∴ AD← ∴ GDPR↓ and PL↓ ∴ u%↑ and π%↓
• ▲ Net Exports (Xn)
• Xn↑ ∴ AD→ ∴ GDPR↑ and PL↑ ∴ u%↓ and π%↑
• Xn↓ ∴ AD← ∴ GDPR↓ and PL↓ ∴ u%↑ and π%↓

Increase in AD

• C↑, Ig↑, G↑, and/or Xn↑ ∴ AD→ ∴ GDPR↑ and PL↑ ∴ u%↓ and π%↑

▲ in SRAS:

• ▲ Input Prices
• Input Prices↓ ∴ SRAS→ ∴ GDPR↑ and PL↓ ∴ u%↓ and π%↓
• Input Prices↑ ∴ SRAS← ∴ GDPR↓ and PL↑ ∴ u%↑ and π%↑
• ▲ Productivity
• Productivity↑ ∴ SRAS→ ∴ GDPR↑ and PL↓ ∴ u%↓ and π%↓
• Productivity↓ ∴ SRAS← ∴ GDPR↓ and PL↑ ∴ u%↑ and π%↑
• ▲ Legal-Institutional Environment
• Deregulation ∴ SRAS→ ∴ GDPR↑ and PL↓ ∴ u%↓ and π%↓
• Regulation ∴ SRAS← ∴ GDPR↓ and PL↑ ∴ u%↑ and π%↑

Increase in SRAS: 

• Input Prices↓, Productivity↑, and/or Deregulation ∴ SRAS→ ∴ GDPR↑ and PL↓ ∴ u%↓ and π%↓

Decrease in SRAS: 

• Input Prices↑, Productivity↓, and/or Regulation ∴ SRAS← ∴ GDPR↓ and PL↑ ∴ u%↑ and π%↑

 

• Keynesian Range:
• Unemployed resources which results in a recession or depression
• Includes only levels of real output that are less than the full employment output
• Intermediate Range:
• Resources are getting closer to the full employment levels which creates upward pressure on wages and prices
• The upward pressure on prices is caused by rising cost of doing business.
• Sticky wages and/or sticky prices cause the AS curve to be positively sloped
• Wages and prices may be slowed to adjust or sticky if firms or workers lack information
• Classical Range:
• When real GDP is at a level with unemployment at the full employment level and where any increase in demand will result only in an increase in prices
• The economy is unable to produce anymore goods and services for a sustainable period of time