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

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The AS-AD Model
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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.
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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.
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Real interest rate r LM(P2) LM(P1) F E IS Y2 Y1 Output Y Relationship between IS-LM and AD (1)
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Relationship between IS-LM and AD (2) Price Level P F P2 E P1 AD Y2 Y1 Output Y
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Why is the AD Curve Negatively Sloping? 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.
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