Question

What is on the horizontal axis of the AD/AS diagram? What is on the vertical axis?

Short answer

The horizontal axis of the AD/AS diagram represents the real GDP (Real Output), while the vertical axis represents the Price Level.

Step-by-step solution

Identification of Horizontal Axis

The horizontal axis of the AD/AS diagram represents the real output or the real GDP (Gross Domestic Product) of an economy. Real GDP is the total value of all final goods and services produced in an economy adjusted for the changes in price level (i.e., inflation or deflation). It is a measure of an economy's overall output and is used to show the quantity of goods and services demanded and supplied in an economy.

Identification of Vertical Axis

The vertical axis of the AD/AS diagram represents the price level, which can be measured using an index such as the Consumer Price Index (CPI) or the GDP deflator. The price level is used as a representation of the overall inflation or deflation in an economy. A higher price level represents a higher average level of prices for goods and services in an economy, while a lower price level represents a lower average level of prices. In summary: - Horizontal Axis: Real GDP (Real Output) - Vertical Axis: Price Level