Lesson 6.1: The AD-AS Model

Flashcards made from a presentation segment created as a lesson on the aggregate demand-aggregate supply model.

AD-AS model

A model that helps visualize the entire economy’s behavior and effects of potential governmental intervention based on aggregate demand and aggregate supply in an economy

• Where the two curves meet determine real GDP, average price levels, and current business cycle status

Aggregate demand (AD)

The total amount of spending on goods and services in the entire economy

Fiscal policy

Policies developed by a government relating to taxes and spending

Monetary policy

Policies developed by a government relating to interest rates and the money supply

Aggregate supply (AS)

The aggregate quantity of output supplied to the economy, modeled through a curve showing its relationship to the aggregate price level

Short-run aggregate supply (SRAS)

An upward-sloping curve showing output changes with price levels in the short run

Short-run aggregate supply shifts (SRAS shifts)

Created by input costs, technology, productivity, and supply shocks relating to a company’s total production of supply

Long-run aggregate supply (LRAS)

A vertical line representing the economy’s maximum total potential output, fixed by long-term factors like labor, capital, and technology and not price levels

Long-run equilibrium

The state where the economy’s aggregate demand, short-run aggreate supply, and long-run aggregate supply curves all intersect at a single point — indicating that the economy is at maximum potential and demand is being adequately fulfilled

Potential output

Full employment and output where AD, SRAS, and LRAS all intersect

Output gap

Any difference between actual aggregate output and potential output

Recessionary gap

Occurs when aggregate output falls below potential output

Inflationary gap

Occurs when aggregate output rises above potential output