AP Macroeconomics The ASAD Model The ASAD Model

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. LRAS PL SRAS 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

Increase in AD LRAS PL P 1 P SRAS AD 1 AD Y YF GDPR C↑, IG↑, G↑ and/or XN↑. : AD . : GDPR↑ & PL↑. : u%↓ & π%↑

Decrease in AD LRAS PL SRAS P P 1 AD AD 1 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 LRAS PL SRAS 1 P P 1 AD Y YF GDPR Input Prices↓, Productivity↑, and/or Deregulation. : SRAS . : GDPR↑ & PL↓. : u%↓ & π%↓

Decrease in SRAS 1 LRAS PL SRAS P P 1 AD Y 1 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 PL 2 PLF ____ Output AD 2 ____ Unemployment Problem: AD 1 YF Y 2 Real GDP (GDPR)

Practice Question #2 • Assume the economy is in equilibrium at full employment If consumer indebtedness rises, 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 PL 2 ____ Unemployment Problem: AD 2 YF AD 1 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, economy what is the impact of the higher production costs on price level, output, and unemployment? • What economic problem/condition results? Price Level LRAS SRAS 2 SRAS 1 AS ____ Price Level PL 2 PLF ____ Output ____ Unemployment Problem: AD Y 2 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 Level SRAS ____ AD ____ Price Level PLF ____ Output PL 1 ____ Unemployment Condition: AD 1 YF AD 2 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 ____ PL 1 ____ Price Level PLF ____ Output AD 1 ____ Unemployment Condition: AD 2 YF Y 1 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 SRAS 1 SRAS 2 PLF ____ AS ____ Price Level ____ Output PL 2 ____ Unemployment AD YF Y 2 Real GDP (GDPR)