Download AS/AD Model

AS/AD Model
Review
AD/AS Model
Note: Price Level = Inflation level
AS1
Price
Level
3
1
2
Real
GDP
The AS Curve 3 phases:
(1) Flat:
occurs during recessions.
Unemployment is high, GDP is low
(2) Sloping Section: no recession.
Unemployment is relatively low but above
the Full Employment level (4%)
(3) Vertical Section: Economy is growing
too fast. Unemployment is below
Full Employment (4%)
(i.e. there are Too many jobs!)
Conclusion of AS: The economy has a speed limit. If it grows too fast, you will
end up with inflation and no increase in GDP (section 3 of AS curve)
AD/AS Model
You draw the AD curve on 1-section of the
AS curve based on the economic situation
UNEMPLOYMENT 3%
GDP TOO FAST
UNEMPLOYMENT 5%
RECESSION
GDP MODERATE
AS1
Price
Level
AD1
AD1
Real
GDP
AD1
FISCAL POLICY
Fiscal Policy will shift AD curve
Economy in recession
AS1
Price
Level
Expansionary fiscal policy needed
AD1
Real
GDP
AD2
Lower Taxes & ↑ Gov’t spending
AD shifts right
End result: higher GDP, more
Jobs & slightly higher inflation