Mr. Mayer AP Macroeconomics The AS/AD Model

The AS/AD Model The equilibrium of AS & AD determines current output (GDPR) and the price level (PL) LRAS SRAS PL P AD YF GDPR

Full Employment Full Employment equilibrium exists where AD intersects SRAS & LRAS at the same point. LRAS SRAS PL P AD YF GDPR

Recessionary Gap A recessionary gap exists when equilibrium occurs below full employment output. SRAS LRAS PL P AD Y YF GDPR

Inflationary Gap An inflationary gap exists when equilibrium occurs beyond full employment output. LRAS SRAS PL P AD YF Y GDPR

Changes (Δ) in AD Δ Consumption (C) Δ Gross Private Investment (IG) C↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑ C↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓ Δ Gross Private Investment (IG) IG↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑ IG↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓ Δ Government Spending (G) G↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑ G↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓ Δ Net Exports (XN) XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑ XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓

C↑, IG↑, G↑ and/or XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑ Increase in AD SRAS LRAS PL  P1  P AD1 AD  Y YF GDPR C↑, IG↑, G↑ and/or XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑

C↓, IG↓, G↓ and/or XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓ Decrease in AD LRAS PL SRAS  P  P1 AD AD1  YF Y GDPR C↓, IG↓, G↓ and/or XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓

Changes (Δ) in SRAS Δ Input Prices Δ Productivity 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 Input Prices↓, Productivity↑, and/or Deregulation LRAS PL SRAS1  P  P1 AD  Y YF GDPR Input Prices↓, Productivity↑, and/or Deregulation .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓

Decrease in SRAS Input Prices↑, Productivity↓, and/or Regulation LRAS PL SRAS  P1  P AD  Y1 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!!!