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AS/AD Model Review. AD/AS Model Note: Price Level = Inflation level Price Level Real GDP AS 1 (1) Flat: occurs during recessions. Unemployment is high,

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Presentation on theme: "AS/AD Model Review. AD/AS Model Note: Price Level = Inflation level Price Level Real GDP AS 1 (1) Flat: occurs during recessions. Unemployment is high,"— Presentation transcript:

1 AS/AD Model Review

2 AD/AS Model Note: Price Level = Inflation level Price Level Real GDP AS 1 (1) Flat: occurs during recessions. Unemployment is high, GDP is low (2) Sloping Section: no recession. Unemployment is relatively low but above the Full Employment level (4%) (3) Vertical Section: Economy is growing too fast. Unemployment is below Full Employment (4%) (i.e. there are Too many jobs!) The AS Curve 3 phases: 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 Price Level Real GDP AS 1 You draw the AD curve on 1-section of the AS curve based on the economic situation AD 1 RECESSION AD 1 UNEMPLOYMENT 3% GDP TOO FAST AD 1 UNEMPLOYMENT 5% GDP MODERATE

4 FISCAL POLICY Price Level Real GDP AS 1 Fiscal Policy will shift AD curve AD 1 AD 2 Economy in recession Expansionary fiscal policy needed Lower Taxes & ↑ Gov’t spending AD shifts right End result: higher GDP, more Jobs & slightly higher inflation


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