Explain Slope of ADAS MODEL

Why the slope of AS Curve

When the price level increase,

the input price cannot fully adjusted ,so the real production cost decreases. Frim would use more facotr inputs to produce more.

Therefore, the short-run output increases.

Explain with one reason why a Long-Run Supply Curve is vertical

In the long run, input prices are fully flexible.

When price level increases, input prices increase proportionately so that the cost of real production remains unchanged.

Firms are not able to raise profits by adjusting their output levels.

Hence, aggregate output remains unchanged in the long run.

Three methods to explain the slope of an AD curve

Wealth Effect:

Price level ⬇ ➡ real wealth ⬆ ➡ consumption ⬆ ➡ output level ⬆ 

Interest Rate Effect:

Price level ⬇ ➡ money demand ⬇ ➡ interest rate ⬇ ➡ investment ⬆ ➡ output level ⬆ 

Net Export Effect:

Price level ⬇ ➡ the price of exports relative to imports ⬇ ➡ exports ⬆ & imports ⬇ ➡ net exports ⬆ ➡ output level ⬆

Explain the slope of AD curve (Wealth Effect)

When the price level rises, 

given that many assets are denominated in nominal terms, the purchasing power of money falls, real wealth decreases, consumption falls, 

and aggregate quantity of output demanded decreases. 

Explain the slope of AD curve (Interest Rate effect)

Interest rate effect

When the price level rises,

given the fixed money supply, the transaction demand for money increases, interest rate rises, investment and consumption fall,

and the aggregate quantity of output demanded decreases. 

Explain the slope of AD curve (Net Export)

Net exports effect

When the domestic price level rises,

imported goods become relatively cheaper, so the volume of imports increases; at the same time, exports become relatively more expensive, and the volume of exports falls.

Therefore, net exports decrease,

and aggregate quantity of output demanded decreases.