Unformatted text preview: AD-AS Model: Extra Handout Key idea: Unlike in the IS-LM model (where prices are fixed), in the AD-AS model prices can change. In particular, whenever Y (production) increases prices (p) increase Next, remember that the position of the LM depends on p (prices)! Higher prices push the LM to the left! In fact, higher prices mean lower real money supply. In a sense, you can think that an increase in prices has the same effects of a reduction in money supply (pushing the LM back) We are now going to see the effects of expansionary fiscal and monetary policy in the AD-AS model and compare them with those in the IS-LM model Expansionary Fiscal Policy IS' IS
This movement of the LM to the left is the only difference from the IS-LM model This movement is due to the increase in prices i Overall Effects i ;Y ;p C I G LM
Remember: prices are increasing because output Y is increasing! Y Expansionary Monetary Policy i IS LM Overall Effects i ;Y p After moving to the right, the LM tends to move C I G= back (to the left) because
prices are increasing This is the only difference from the IS-LM model LM'
Remember: prices are increasing because output Y is increasing! Y ...
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