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AS/AD Model

AS/AD Model. Review. AD/AS Model. AS 1. 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

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AS/AD Model

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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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