The AS/AD Model

-The equilibrium of AS and AD determines current output (GDPr) and the price level (PL)

Full employment
- full employment equilibrium exists where AD intersects SRAS and LRAS at the same point

Recessionary Gap:
- a recession gap exists when equilibrium occurs below full employment output

Inflationary Gap:
-an inflationary gap occurs when equilibrium occurs beyond full employment output


Keynesian Range :

-recession or depression
-not fully using all your resources
-below the FE

Intermediate : 

-Resources are getting closer to full employment levels which creates upward pressure on wages and prices

Classical or vertical range :

-When real GDP is at a level below the full employment level where any increase in demand will resolve only in an increase in prices.


Demand-Pull Inflation : 

 -An increase in average price level resulting from an increase in total spending
in the economy.

-Total spending = C+Ig+G+Xn
nations AD
- increase in AD

Cost-Push Inflation :Occurs when firms respond to rising costs by increasing their prices to protect profit margins.

caused by

1. Rising unit labor costs

2. Increase in price of raw material/important components

3. Depreciation in exchange rate
causing a rise in import costs

4. An increase in business
taxes ex: VAT or environmental
taxes such as a carbon tax

Factors Affecting Inflationary PressuresRise property prices > Increase consumer wealth > Demand-pull inflation risk

Increase world oil prices > Higher costs for businesses > Cost-push inflation risk

Depreciating exchange rate > Increased import prices + rising exports > Cost-push and Demand-pull risk

The rapid expansion of money and credit from banks > rising consumer spending financed by loans > Demand-pull inflation risk