Download AS AD Model Notes

AP Macroeconomics
The AS/AD Model
The AS/AD Model
• The equilibrium of AS & AD determines
current output (GDPR) and the price level
(PL)
PL
LRAS
SRAS
P
AD
YF
GDPR
Full Employment
• Full Employment equilibrium exists where
AD intersects SRAS & LRAS at the same
point.
PL
LRAS
SRAS
P
AD
YF
GDPR
Recessionary Gap
• A recessionary gap exists when equilibrium
occurs below full employment output.
SRAS
LRAS
PL
P
AD
Y
YF
GDPR
Inflationary Gap
• An inflationary gap exists when equilibrium
occurs beyond full employment output.
PL
LRAS
SRAS
P
AD
YF Y
GDPR
Changes (Δ) in AD
• Δ Consumption (C)
– C↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
– C↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
• Δ Gross Private Investment (IG)
– IG↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
– IG↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
• Δ Government Spending (G)
– G↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
– G↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
• Δ Net Exports (XN)
– XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
– XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
Increase in AD
LRAS
PL
SRAS

P

P1
AD1
AD

Y
YF
GDPR
C↑, IG↑, G↑ and/or XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
Decrease in AD
LRAS
PL
SRAS

P

P1
AD
AD1

YF
Y
GDPR
C↓, IG↓, G↓ and/or XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
Changes (Δ) in SRAS
• Δ Input Prices
– Input Prices↓ .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
– Input Prices↑ .: SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑
• Δ Productivity
– Productivity↑ .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
– Productivity↓ .: SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑
• Δ Legal-Institutional Environment
– Deregulation .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
– Regulation .: SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑
Increase in SRAS
SRAS
LRAS
PL
SRAS1

P

P1
AD

Y
YF
GDPR
Input Prices↓, Productivity↑, and/or Deregulation
.: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
Decrease in SRAS
SRAS1
LRAS
PL
SRAS

P

P1
AD

Y1
YF
GDPR
Input Prices↑, Productivity↓, and/or Regulation
.: SRAS  .: GDPR↓ & PL↑ .: u%↑ & π%↑
AS / AD Summary
• ΔC, ΔIG, ΔG, and/or ΔXN = Δ AD
– AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
– AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
• Δ Input Prices, Δ Productivity,
and/or Δ Regulation = Δ SRAS
– SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
– SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑
• The AS/AD Model is the most important
graph in AP Macroeconomics.
• KNOW IT!!!
AD-AS Model Practice
Questions
Use an appropriately labeled AD-AS
model to illustrate the impact of
each of the following events on
price level, output, and
unemployment.
Practice Question #1
• Assume the economy is in equilibrium at full
employment. If government spending (G) increases
due to an outbreak of war, what is the impact of the
spending on price level, output, and unemployment?
• What economic condition or problem results?
Price
Level
LRAS
SRAS
AD
____ ____
____ Price Level
PL2
PLF
____ Output
AD2
____ Unemployment
Problem:
AD1
YF Y2
Real GDP (GDPR)
Practice Question #2
• Assume the economy is in equilibrium at full
employment. If consumer indebtedness rises,
what is the impact of the indebtedness on the
price level, output, and unemployment?
• What economic condition or problem results?
Price
Level
LRAS
SRAS
AD
____ ____
____ Price Level
PLF
____ Output
PL2
____ Unemployment
Problem:
AD2
Y2
YF
AD1
Real GDP (GDPR)
Practice Question #3
• Assume the economy is in equilibrium at full employment. If
OPEC restricts the supply of oil and raises energy costs across
the economy, what is the impact of the higher production
costs on price level, output, and unemployment?
• What economic problem/condition results?
Price
Level
LRAS
SRAS2
SRAS1
AS
____ ____
____ Price Level
PL2
PLF
____ Output
____ Unemployment
Problem:
AD
Y2 YF
Real GDP (GDPR)
Practice Question #4
• Assume the economy is in a recession. If
government reduces personal income taxes, what is
the impact of the tax cut on price level, output, and
unemployment?
• What economic condition may result?
LRAS
Price
SRAS
____ AD
____
Level
____ Price Level
PLF
____ Output
PL1
____ Unemployment
Condition:
AD1
Y1
YF
AD2
Real GDP (GDPR)
Practice Question #5
• Assume the economy is overheated and experiencing
serious demand-pull inflation. If the FED increases interest
rates by reducing the money supply, what will be the
impact of the FED action on the price level, output, and
unemployment?
• What problem or condition may result?
Price
Level
LRAS
SRAS
AD
____ ____
PL1
____ Price Level
PLF
____ Output
AD1
____ Unemployment
Condition:
AD2
YF Y1
Real GDP (GDPR)
Practice Question #6
• Assume the economy is in equilibrium at full
employment. If productivity increases due to
technological developments, what is the impact of
the increased productivity on the price level,
output, and unemployment?
Price
Level
LRAS
SRAS1
SRAS2
PLF
____ AS
____
____ Price Level
____ Output
PL2
____ Unemployment
AD
YF Y2
Real GDP (GDPR)