The AD-AS Model is useful for visuallising;

• Visuallising expansions & contractions of the business cycle;
• Visuallising problems assosciated with the B.C, mianly Unemployment, and Inflation.

Visuallising Business Cycle Contractions §

Negative AD Shock §

• Assume the economy is in long-run Equilibrium (, Intersect at )
• A reduction of Aggregate Demand down to occurs. This would cause firms to cut prouduction, causing income and employment to fall, thus, Real Output would fall from >> .
• The economy is further away from capacity, thus, there is reduced Inflationary pressure so the price level fall from to .

Negative AS Shock §

This economy starts at long-run equilibrium, then experiences a Aggregate Supply Shock.

• We begin at Long-run Equilibrium
• The AS Shock occurs; 🠱Production Costs >> 🠱Upwards Pressure on price (Stagflation)
• Prices rise from to due to Upwards pressure.
• Similar to the AD Shock, Output drops from to .

Difference between negative AS / AD Shock

Aggregate Demand Shock causes decreases in price & decrease in output Aggregate Supply Shock causes increase in price & decrease in output

Visualising Expansions §

Positive AD Expansion §

Expansionary Visual AD Increase.excalidraw In Australia’s recent mining construction boom;

• 🠱 Investment Spending, & Strong commodity exports AD Curve shifts from to due to 🠱Inv. & Strong comodity exports.
  • AD=(C+🠱I+G+(🠱X-M))
• 🠱AD >> 🠱Employment, and 🠱Income, and 🠱Production/Output (Real GDP) shifting from to (Econ. Growth = 4.4%), 10% in WA / Queensland ⬇Unemployment to 4% (below that times natural level)
• Likely pressure on price level as the econonomy approaches capacitiy, causing shift from to .

Positive AS Expansion §

Expansionary Visual AS Increase.excalidraw An Expansion caused by the AS curve shifting right will cause inflation to fall. This would be because we will have increased output without increasing price levels.