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AD/AS Model

AD/AS Model. Aggregate = Total. Aggregate Demand = Total demand in the economy Aggregate Supply = Total supply in the economy. AD/AS Model. Shows the total demand in an economy at each price level Price Level = general level of prices (Measures inflation)

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AD/AS Model

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  1. AD/AS Model

  2. Aggregate = Total Aggregate Demand = Total demand in the economy Aggregate Supply = Total supply in the economy AD/AS Model

  3. Shows the total demand in an economy at each price level • Price Level = general level of prices (Measures inflation) • Aggregate demand is demand from each of the sectors of the economy Aggregate Demand Curve

  4. AD = consumption spending (c) + Investment spending (I) + government spending (g) + net exports[exports (x) – Imports (m)] • If any of the components increases, then AD will increase and cause the AD curve to shift to the right • If any of these components decreases, the AD will decrease and cause the AD curve to shift to the left Aggregate Demand

  5. Change in any variable in the AD equation (AD=C+ I+ G+ (X-M)) will move the AD curve itself. Shift to the right C G X Shift to the Left C G X Shifts of the AD curve

  6. The aggregate supply curve shows the total output in an economy at each price level • The aggregate supply curve is drawn assuming that • Nominal wages (Cost of production) • Import prices (cost of raw materials) • Productivity ( influenced by investment and technology) Are all held constant Aggregate Supply

  7. Shift to the right: Wages Imported raw materials Productivity Shift to the left Wages Imported raw materials Productivity Shifts of the AS curve

  8. Occurs where AD=AS and the price level PLe. This level also indicates the level of employment (Ye) Equilibrium represents where the economy will tend to move towards. Once we are at this equilibrium the economy will stay here unless AD or AS moves Equilibrium AD/AS PLe Equilibrium Ye

  9. Equilibrium AD/AS Full employment (economic potential) PLe Yr 13 Only Equilibrium Ye Yf

  10. Changes to Equilibrium A change in either aggregate demand or aggregate supply results in a change in the equilibrium price level and a change in the level of national income, output and employment. • An increase in AS • A decrease in the price level • An increase in real income, output and employment AS’’ Price Level AS’ PL ‘’ PL A decrease in AS • An increase in the price level • A decrease in real income, output and employment levels PL’ Ye’’ Ye’ Y Ye

  11. Changes in AD and AS • What will happen if there is an increase in AD? • Increase in price level • Increase in real income, output and employment • What will happen if there is a decrease in AD? • A decrease in price level • A decrease in real income, output and employment.

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