1. Mr. Mayer AP Macroeconomics
The AS/AD Model

2. The AS/AD Model
The equilibrium of AS & AD determines current output (GDPR) and the price level (PL)
LRAS
SRAS PL P AD YF
GDPR

3. Full Employment
Full Employment equilibrium exists where AD intersects SRAS & LRAS at the same point.
LRAS
SRAS PL P AD YF
GDPR

4. Recessionary Gap
A recessionary gap exists when equilibrium occurs below full employment output.
SRAS
LRAS PL P AD Y YF
GDPR

5. Inflationary Gap
An inflationary gap exists when equilibrium occurs beyond full employment output.
LRAS
SRAS PL P AD YF Y
GDPR

6. Changes (Δ) in AD Δ Consumption (C) Δ Gross Private Investment (IG)
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%↓

7. C↑, IG↑, G↑ and/or XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
Increase in AD
SRAS
LRAS PL  P1  P
AD1 AD  Y YF
GDPR
C↑, IG↑, G↑ and/or XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑

8. 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%↓

9. Changes (Δ) in SRAS Δ Input Prices Δ Productivity
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%↑

10. Increase in SRAS Input Prices↓, Productivity↑, and/or Deregulation
LRAS PL
SRAS1  P  P1 AD  Y YF
GDPR
Input Prices↓, Productivity↑, and/or Deregulation
.: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓

11. Decrease in SRAS Input Prices↑, Productivity↓, and/or Regulation
LRAS PL
SRAS  P1  P AD  Y1 YF
GDPR
Input Prices↑, Productivity↓, and/or Regulation
.: SRAS  .: GDPR↓ & PL↑ .: u%↑ & π%↑

12. 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!!!