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Chapter 24: Q. 33 (page 602)

How is recession illustrated in an AD/AS model?

Short Answer

Expert verified

The recession makes a leftward shift of the AD curve.

Step by step solution

01

Definition

AD/AS Model illustrates the aggregate demand and aggregate supply of goods and services in an economy for the short-run and the long-run period.

02

Explanation

During a recession period, the economy's aggregate demand falls due to which equilibrium point changes. The aggregate demand falls below its potential GDP which means the AD curve shifts to the left due to which the economy faces loss.

03

Graph

As shown in Fig 1 during the recession the AD curve shifts leftward from AD to AD1

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Most popular questions from this chapter

The imaginary country of Harris Island has the

aggregate supply and aggregate demand curves as Table 24.3shows.

a. Plot the AD/AS diagram. Identify the equilibrium.

b. Would you expect unemployment in this economy to be relatively high or low?

c. Would you expect concern about inflation in this

economy to be relatively high or low?

d. Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275at every price level.

Identify the new aggregate equilibrium.

e. How will the shift in AD affect the original

output, price level, and employment?

The short-run aggregate supply curve was constructed assuming that as the price of outputs increases, the price of inputs stays the same. How would an increase in the prices of important inputs, like energy, affect aggregate supply?

Name some factors that could cause the SRAS curve to shift, and say whether they would shift SRAS to the right or to the left.

Do neoclassical economists believe in Keynes’ law or Say’s law?

Some politicians have suggested tying the minimum wage to the consumer price index (CPI). Using the AD/AS diagram, what effects would this policy most likely have on output, the price level, and employment?
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