1. AS/AD Model
Review

2. AD/AS Model The AS Curve 3 phases: (1) Flat: occurs during recessions.
Note: Price Level = Inflation level
The AS Curve 3 phases:
(1) Flat: occurs during recessions.
Unemployment is high, GDP is low
Price
Level
AS1 3
(2) Sloping Section: no recession.
Unemployment is relatively low but above
the Full Employment level (4%) 2 1
(3) Vertical Section: Economy is growing
too fast. Unemployment is below
Full Employment (4%)
(i.e. there are Too many jobs!)
Real
GDP
Conclusion of AS: The economy has a speed limit. If it grows too fast, you will
end up with inflation and no increase in GDP (section 3 of AS curve)

3. AD/AS Model You draw the AD curve on 1-section of the
AS curve based on the economic situation
AD1
UNEMPLOYMENT 3%
GDP TOO FAST
Price
Level
AS1
AD1
UNEMPLOYMENT 5%
GDP MODERATE
AD1
RECESSION
Real
GDP

4. FISCAL POLICY Fiscal Policy will shift AD curve Economy in recession
Price
Level
AS1
AD2
Expansionary fiscal policy needed
AD1
Lower Taxes & ↑ Gov’t spending
AD shifts right
Real
GDP
End result: higher GDP, more
Jobs & slightly higher inflation