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 (quantity of goods and services produced), while the vertical axis represents the price level in the economy.

Step-by-step solution

Understanding the Aggregate Demand/Aggregate Supply (AD/AS) Model

The AD/AS model is a macroeconomic model that represents the relationship between the total output (real GDP) and the price level of an economy. The model includes the aggregate demand curve (AD), which shows the relationship between the overall demand for goods and services and the price level, and the aggregate supply curve (AS), which shows the total supply of goods and services in the economy at different price levels.

Determining the Horizontal Axis Variable in the AD/AS Diagram

The horizontal axis of the AD/AS diagram represents the quantity of goods and services produced in the economy, which is the real GDP. Real GDP is an important measure of an economy's output and indicates the total production of goods and services, adjusting for changes in price levels and inflation. This variable is crucial for understanding how changes in aggregate demand and aggregate supply affect the size of an economy.

Determining the Vertical Axis Variable in the AD/AS Diagram

The vertical axis of the AD/AS diagram represents the price level in the economy. The price level is an index that measures the average prices of goods and services in an economy. It is used to provide a representation of inflation, or the rate at which the overall price levels in the economy are changing. This helps in understanding the relationship between inflation, output, and the balance between aggregate demand and aggregate supply. In summary, the horizontal axis of the AD/AS diagram represents the real GDP (quantity of goods and services produced) and the vertical axis represents the price level in the economy.