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UNIT 3: AS/ AD Model

AS/AD Model
*The equilibrium of AS & AD determines current output (GDPr) and the price level (PL)

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
Π- inflation
∆ in Consumption (C)
*C ↑.: AD → .: GDPr ↑ & PL↑.: u% ↓ & Π% ↑
*C ↓ .: AD ← .: GDPr ↓& PL ↓ .:u% ↑ & Π% ↓ 
∆ in Gross Private Investment (Ig)
*Ig ↑.: AD → .: GDPr ↑ & PL↑.: u% ↓ & Π% ↑
*Ig  ↓.: AD ← .: GDPr ↓& PL ↓ .:u% ↑ & Π% ↓
 ∆ in Gov't Spending (G)
*G ↑.: AD → .: GDPr ↑ & PL↑.: u% ↓ & Π% ↑
*G ↓ .: AD ← .: GDPr ↓& PL ↓ .:u% ↑ & Π% ↓
∆ in Net Exports (Xn)
*Xn ↑.: AD → .: GDPr ↑ & PL↑.: u% ↓ & Π% ↑*Xn ↓ .: AD ← .: GDPr ↓& PL ↓ .:u% ↑ & Π% ↓
 

 Increase in AD 

C↑, Ig↑, G↑, and/or Xn↑ .: AD→.:GDPr↑ & PL↑.: u% ↓ & Π% ↑
Decrease in AD

C↓, Ig ↓, G↓ and/or Xn↓, .: AD← .: GDPr ↓& PL ↓ .:u% ↑ & Π% ↓
Changes (∆) in SRAS∆ Input Prices
*Input prices ↓ .: SRAS→ .: GDPr ↑ & PL↑.: u% ↓ & Π% ↓
*Input Prices ↑.: SRAS← .: GDPr ↓& PL ↓.:u% ↑ & Π% ↑
∆ Productivity
*Productivity ↑.:SRAS→ .: GDPr ↑ & PL↓.: u% ↓ & Π% ↓
*Productivity ↓.:  SRAS← .: GDPr ↓& PL↑ .:u% ↑ & Π% ↑
∆ Legal-Institutional Environment
*Deregulation.: SRAS→ .: GDPr ↑ & PL↓.: u% ↓ & Π% ↓
*Regulation.: SRAS← .: GDPr ↓& PL↑ .:u% ↑ & Π% ↑
Increase in SRAS

Input prices ↓, Productivity ↑, and/or Deregulation.: SRAS→ .: GDPr ↑ & PL↓.: u% ↓ & Π% ↓ 
Decrease in SRAS


Input Prices ↑, productivity ↓, and/or Regulation.: SRAS← .: GDPr ↓& PL↑ .:u% ↑ & Π% ↑



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