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The aggregate demand-aggregate supply (AD-AS) model

Understanding and creating graphs are critical skills in macroeconomics. In this article, you’ll get a quick review of the aggregate demand-aggregate supply (AD-AS) model, including:
  1. what it’s used to illustrate
  2. key elements of the model
  3. some examples of questions that can be answered using that model.

What the AD-AS model illustrates

The AD-AS (aggregate demand-aggregate supply) model is a way of illustrating national income determination and changes in the price level. We can use this to illustrate phases of the business cycle and how different events can lead to changes in two of our key macroeconomic indicators: real GDP and inflation.

Key Features of the AD-AS model

  • Two axes: a vertical axis labeled “Price level” or “PL” and a horizontal axis labeled “real GDP.”
  • A downward sloping aggregate demand curve labeled “AD.” An upward sloping short-run aggregate supply curve labeled “SRAS.”
- An equilibrium price level and real GDP. These should be labeled as indicated in the question.
  • A vertical long-run aggregate supply curve labeled “LRAS.” The LRAS should be vertical at the full employment output. The placement of the LRAS curve will depend on whether the economy has an output gap or is in long-run equilibrium. For example, the economy in the graph shown here is in a recession

Helpful reminders for the AD-AS model

  • Label any equilibrium on the axis, not the interior
  • The placement of the LRAS gives important information about the state of the economy. For example, if the equilibrium output is to the left of the LRAS, then the economy is in a recession.

Most common uses of the AD-AS model

  • Showing a recession, with Y, start subscript, 1, end subscript representing current output and Y, start subscript, f, end subscript representing full employment output. Note that Y, start subscript, 1, end subscript is less than Y, start subscript, f, end subscript during a recession.
Showing an economy in long-run equilibrium, with Y_1 representing current and Y_f representing full employment output. Note that Y_1 equals Y_f in long-run equilibrium.
-Showing an economy producing beyond full employment output, with Y_1 representing current output and Y_f representing full employment output. Note that Y_1 is greater than Y_f when an economy is producing more than full employment output.

Spróbuj sam

Here is an example of a question using the AD-AS model from the 2013 AP Macroeconomics exam. Try to solve it on your own, and then click on the solution to compare your work to the correct answer.

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