Graphs

The AS/AD Model
-The equilibrium of AS and AD determines current output (GDPr) and the price level (PL)
-Determanents cause shifts


Full employment
-Full employment equilibrium exists where AD intersects SRAS and LRAS at the same point

Recessionary Gap
-A recessionary gap exists when equilibrium occurs below full employment output


Inflationary Gap
-Exists when equilibrium occurs beyond FE output


Changes in AD
Changes in: Consumption (C), Gross Private Investment (Ig), Government spending (G), Net exports (Xn)


Increase in AD

C, Ig, G, Xn, GDPr, PL, Inflation: increase
Unemployment: decreases
AD shifts right

Decrease in AD 



C, Ig, G, Xn, GDPr, PL, Inflation: Decrease
Unemployment: increases
AD shifts left

Change in SRAS
Change in input prices, productivity, and legal institutional environment (Deregulation and regulation) 


Increase in SRAS

Input prices, unemployment, inflation, price level: Decrease
Productivity, GDPr: Increase
Deregulation

Decrease in SRAS


Input prices, unemployment, inflation, price level: Increase
Productivity, GDPr: Decrease
Regulation