02/21/14 AS/AD Model

• Full Employment
• Full employment equilibrium exists where AD intersects SRAS & LRAS at the same point.

• Recessionary Gap
• A recessionary gap exists when equilibrium occurs below fall employment output.

• Inflationary Gap
• An inflationary gap exists when equilibrium occurs beyond full employment input.

• Increase in AD

• Increases in SRAS

• Input prices go down, productivity goes up, and/or deregulation SRAS
• 3 Ranges of the Aggregate Supply Curve
1. Horizontal or Keynesian
• Included only levels of real output that are less than the full employment output.
• It implies that the economy is in a recession.
2. Vertical or Classical Range
• The economy reaches its full capacity real output.
• Increase in price level= constant production.
3. Intermediate Range
• Expansion of real output and price level
• The actual GDP can exceed full employment.