AD-AS model Flashcards
(13 cards)
What does the AD–AS model explain in macroeconomics?
It explains changes in output (real GDP) and price level (inflation) in the short and long run using aggregate demand and aggregate supply curves.
What is the formula for aggregate demand (AD)?
AD = C + I + G + (X - M)
Why is the AD curve downward sloping?
Due to the wealth effect, interest rate effect, and exchange rate effect.
What does the short-run aggregate supply (SRAS) curve represent?
The quantity of goods and services firms will produce at various price levels, assuming fixed input prices.
Why is the SRAS curve upward sloping?
Because higher prices increase profits, encouraging firms to increase output.
What does the long-run aggregate supply (LRAS) curve show?
The economy’s maximum sustainable output level at full employment, independent of the price level.
Why is the LRAS curve vertical?
Because long-run output depends on resources and technology, not the price level.
What causes the AD curve to shift?
Changes in consumer confidence, fiscal or monetary policy, investment, and net exports.
What causes the SRAS curve to shift?
Changes in input costs, supply shocks, and productivity or technology changes.
What is macroeconomic equilibrium in the AD–AS model?
The point where AD and SRAS intersect, determining the current output and price level.
What happens in the long run if output is above full employment?
Wages and input costs rise, shifting SRAS left until output returns to full employment.
What is a positive output gap?
When actual GDP exceeds potential GDP, leading to inflationary pressure.
What is a negative output gap?
When actual GDP is below potential GDP, leading to unemployment and underutilised resources.
