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22 The AD - AS Model, Part 2-1

22 The AD - AS Model, Part 2-1 - Agenda Aggregate Demand...

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1 22-1 The IS – LM / AD – AS Model: A General Framework for Macroeconomic Analysis, Part 2 22-2 Agenda Aggregate Demand and Aggregate Supply 22-3 Aggregate Demand and Aggregate Supply • The AD-AS model is derived from the IS-LM model. ¾ The two models are equivalent. ¾ Depending on the particular issue, one model may prove more useful than the other model. • The IS-LM model relates the real interest rate to output. • The AD-AS model relates the price level to output. 22-4 The AD Curve The aggregate demand curve: ¾ The AD curve shows the relationship between the quantity of goods demanded and the price level when the goods market and the asset market are in equilibrium. So the AD curve represents the price level and output level at which the IS and LM curves intersect.
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2 22-5 Derivation of the AD Curve r Y Y P 22-6 The AD Curve Y P 22-7 The AD Curve The aggregate demand curve: ¾ The AD curve is unlike other demand curves, which relate the quantity demanded of a good to its relative price.
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