Transcript Mr. Mayer AP Macroeconomics

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)
PL
LRAS
SRAS
P
AD
YF
GDPR
Full Employment
• Full Employment equilibrium exists where
AD intersects SRAS & LRAS at the same
point.
PL
LRAS
SRAS
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.
PL
LRAS
SRAS
P
AD
YF Y
GDPR
Changes (Δ) in AD
• Δ Consumption (C)
– 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%↓
Increase in AD
LRAS
PL
SRAS

P

P1
AD1
AD

Y
YF
GDPR
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
– 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
SRAS
LRAS
PL
SRAS1

P

P1
AD

Y
YF
GDPR
Input Prices↓, Productivity↑, and/or Deregulation
.: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
Decrease in SRAS
SRAS1
LRAS
PL
SRAS

P

P1
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!!!