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Understanding the AS/AD Model: Phases of the Aggregate Supply Curve

Explore the three phases of the Aggregate Supply (AS) curve as depicted in the AD/AS model. This analysis highlights the flat section during recessions, the sloping section of moderate growth, and the vertical section when the economy grows too fast, leading to inflation. Discover the implications of fiscal policy in shifting the Aggregate Demand (AD) curve, promoting higher GDP and job creation while managing inflation levels. Understand how economic indicators like unemployment rates interact within this model to define growth limits and policy needs.

hamish-mcdaniel
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Understanding the AS/AD Model: Phases of the Aggregate Supply Curve

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  1. AS/AD Model Review

  2. AD/AS Model AS1 Note: Price Level = Inflation level The AS Curve 3 phases: (1) Flat:occurs during recessions. Unemployment is high, GDP is low Price Level 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 RECESSION UNEMPLOYMENT 3% GDP TOO FAST UNEMPLOYMENT 5% GDP MODERATE AS1 AD1 AD1 AD1 You draw the AD curve on 1-section of the AS curve based on the economic situation Price Level Real GDP

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

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