APMacro: AD-AS Graphing


When aggregate demand (AD) or aggregate supply (AS) shifts, changes will occur in the price level and the real GDP.

AD-AS Recession

If an economy had been at full employment real GDP, a decrease in AD, which means higher unemployment reduces spending, which would move the AD curve to the left. Price levels falls and real GDP declines. This is a recessionary gap.

AD-AS Cost Push Inflation

If an economy had been at full employment real GDP,  negative supply shock would move the aggregate supply curve to the left. Price level would rise and real GDP decline. This is a recessionary gap as well.

AD-AS Demand Pull Inflation

If an economy had been at full employment real GDP, an increase in aggregate demand, which means lower unemployment boosts spending, which would move the AD curve to the right. Price level increases and real GDP increases. This is an inflationary gap.

AD-AS LRAS Inflation

If an economy had been at full employment real GDP, a positive supply shock would move the short run aggregate supply curve to the right. Price level would fall and real GDP increase. This is an inflationary gap as well.


Homework:
1) Chapter 10 page 203 #4, 5, 6, 7
2) Learnerator: Scarcity, Choices, Opportunity Cost #1-22

Arrows-02-june

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