Unit 3- Topic 3: The AS/AD Model

The AS/AD Model- The equilibrium of AS & AD determines current output (GDPR) and the price level (PL)

Full Employment- Full Employment equilibrium exists where AD intersects SRAS & 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.

(Lower case (u))- stands for employment
(Pie (𝞹))- stands for inflation

3 Ranges of Aggregate Supply

Horizontal or Keynesian Range- A lot of unemployed resources which creates a recession or depression. It includes only levels of only real GDP that are less than the full employment output.

Intermediate Goods- Resources are getting closer to the full employment level which creates pressure on wages and prices.

Classical or Vertical Range- This is where real GDP at a level with unemployment at the full employment level and where any increase in demand will result in only increase in prices. The economy is unable to produce any more goods and services for a sustainable period of time.