as-ad_model_19032007_01

as-ad_model_19032007_01 - The AS-AD Model The AS-AD Model...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
The AS-AD Model
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The AS-AD Model versus the IS-LM Model The AS-AD Model is not more complicated than the IS-LM Model. IS-LM can only deal with the demand side of the economy. Any increase in output is only an increase in aggregate demand. IS-LM cannot deal with important changes related to the supply side of the economy, such as technological improvement, population increase or capital accumulation.
Background image of page 2
The AS-AD Model versus the IS-LM Model IS-LM cannot effectively deal with changes in general price level in the economy. It does not offer insights on inflation. IS-LM works well only when wages and prices are rigid, or the aggregate supply curve is horizontal. AS-AD is a more complete model.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Real interest rate r LM(P2) LM(P1) F E IS Y2 Y1 Output Y Relationship between IS-LM and AD (1)
Background image of page 4
Relationship between IS-LM and AD (2) Price Level P F P2 E P1 AD Y2 Y1 Output Y
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
There is no need to derive in class the AD Curve from IS-LM. One can go directly to the AD Curve. There is an important difference between the aggregate demand AD and the demand curve for a specific good. The demand curve for apples relates the
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 19

as-ad_model_19032007_01 - The AS-AD Model The AS-AD Model...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online