Lec Topic 9 AD-AS model

The AD-AS model provides insights into the business cycle, focusing on macroeconomic equilibrium.
Key topics include the distinction between short-term fluctuations and long-term economic trends, characteristics of business cycles, and macroeconomic indicators.
The framework emphasizes how aggregate demand (AD) and aggregate supply (AS) influence economic stability and output.

Understand how aggregate demand and aggregate supply determine macroeconomic equilibrium.
Evaluate the forces affecting total goods and services desired by buyers.
Assess the determinants shaping the total supply of goods and services by businesses.
Forecast the economy's response to changing conditions.
Distinguish immediate effects from short-run and long-run consequences of economic shocks.

The AD-AS framework extends microeconomic supply and demand concepts to determine macroeconomic outcomes.
Key terms:
- Aggregate Demand Curve: Downward-sloping, reflecting inverse relationship between price level and output demanded.
- Aggregate Supply Curve: Upward-sloping, showing direct relationship between price level and output supplied.

Equilibrium occurs when quantity demanded equals quantity supplied (intersection of AD and AS curves).
The current state of the economy largely follows this equilibrium condition.

The AD curve shifts in response to changes in aggregate expenditure components (Consumption, Investment, Government spending, Net Exports).
Positive Shifts: Higher aggregate expenditure shifts curve right, indicating increased output and GDP.
Negative Shifts: Lower expenditure shifts left, indicating decreased output and potential recession.

Consumption: Influenced by consumer confidence, wealth, government assistance, taxes, and economic inequalities.
Investment: Affected by expected profitability, economic growth, tax incentives, lending standards, and corporate taxation.
Government Purchases: Changes in fiscal policy (e.g., spending bills) can lead to shifts in aggregate demand.
Net Exports: External factors such as global GDP growth and trade barriers impact net exports and affect aggregate demand.

The AS curve shifts due to variations in production costs such as:
- Input Prices: Increases in costs shift AS left, while decreases shift it right.
- Productivity: Enhanced productivity reduces costs and shifts AS right.
- Exchange Rates: A depreciating dollar raises production costs; conversely, an appreciating dollar lowers costs and increases competition.

When AS increases (shifts right), it often leads to higher GDP and lower prices, indicating economic expansion.
Conversely, when production costs rise (shifts left), GDP may fall, leading to recession and price increases.

Very Short-Run AS Curve: Fixed prices lead to output changes without immediate price level changes.
Short-Run AS Curve: Some suppliers adjust prices as conditions change, leading to temporary price rigidity.
Medium-Run AS Curve: More suppliers adjust their prices, leading to a steeper curve, reflecting changing economic conditions.
Long-Run AS Curve: Represents full adjustment of prices, where output remains constant at potential output with price level adjustments.

Inflation-Induced: Changes in interest rates that do not shift the AD curve directly.
Output-Induced: Interest rate adjustments that change real interest rates and shift the AD curve.

Government spending and tax policy changes can shift the AD curve as GDP is impacted by fiscal measures (e.g., spending bills, tax adjustments).

Follow a systematic approach to assess shifts in AD or AS, determining if they represent increases or decreases, then estimate changes in the new equilibrium price level and output.