The aggregate demand/ aggregate supply models

THE AD/AS MODEL

• The equilibrium of AD and AS determines the current output (REAL GDP) and the price level (PL)
• Full Employment
• Full employment equilibrium exists where AD intersects SRAS and LRAS at the same point.

• Recessionary Gap
• A recessionary gap exists when equilibrium occurs below full employment output.

• Inflationary Gap 
• An inflationary gap exists when equilibrium occurs beyond full employment output.

CHANGES (𝚫) in AD

CHANGES in SRAS

INCREASE

DECREASE

THREE RANGES 

• Horizontal or Keynesian Range: A lot of unemployed resources which creates a recession or depression. 
• Includes only levels of real GDP that are less than the full employment output.
• Intermediate Range: Resources are getting closer to the full employment level, which creates pressure on wages and prices.
• Vertical/Classical Range: Where real GDP is at a level with unemployment at the full employment level, and where any increase in demand will result only in an increase in prices.
• The economy is unable to produce any more goods and services for a sustainable period of time.