Equilibrium in the AD-AS Model
Introduced| English | Meaning |
|---|---|
| AD-AS model/ˌeɪ ˈdiː ˌeɪ ˈes ˈmɒdl/ | A framework relating the general price level and real output through aggregate demand and aggregate supply. |
| short-run macroeconomic equilibrium/ʃɔːt rʌn ˌmækrəˌriːkəˈnɒmɪk ˌiːkwɪˈlɪbrɪəm/ | The real output and price level where aggregate demand intersects short-run aggregate supply. |
| full-employment equilibrium/fʊl emˈplɔɪmənt ˌiːkwɪˈlɪbrɪəm/ | An equilibrium in which actual real output equals potential output and unemployment is at its natural rate. |
| recessionary gap/rɪˈseʃənəri ɡæp/ | The shortfall of actual or equilibrium output below an economy's potential output. |
| inflationary gap/ɪnˈfleɪʃənəri ɡæp/ | The amount by which actual output exceeds potential output in an aggregate demand and supply model. |
Demand and supply, for the whole economy
- Put aggregate demand and aggregate supply on one diagram.
- Where they cross sets the economy's price level and real output.
- Add the vertical LRAS, and you can see whether the economy is healthy.
- This is the AD-AS model 总需求-总供给模型.
Short-run equilibrium
- Short-run macroeconomic equilibrium 短期宏观经济均衡 is where AD crosses SRAS.
- There, the output buyers want equals the output firms make — no pressure to change.
- Read the equilibrium price level off the vertical axis and real output off the horizontal.
The AD-AS model
Short-run equilibrium is where AD meets SRAS. Compare it to LRAS — below potential is a recessionary gap, above is an inflationary gap.
Short-run macroeconomic equilibrium is where:
Difficulty 1/5 · 100 coins + a small bonus on first completion today
Where AD meets SRAS, the output demanded equals the output supplied in the short run.
Three cases and the output gap
- Compare where the economy is (AD-SRAS crossing) with where it could sustainably be (LRAS).
- Output equals potential → full-employment equilibrium 充分就业均衡, no gap.
- Output below potential → a recessionary gap 衰退缺口, unemployment above natural.
- Output above potential → an inflationary gap 通货膨胀缺口, prices being pushed up.
If short-run equilibrium output is below potential (LRAS), the economy has:
Difficulty 1/5 · 100 coins + a small bonus on first completion today
Output below potential means high unemployment — a recessionary gap.
When equilibrium output equals potential output, the economy is at ______-employment equilibrium.
Difficulty 1/5 · 100 coins + a small bonus on first completion today
At full employment, AD, SRAS, and LRAS all meet at one point with no gap.
An inflationary gap means equilibrium output is below potential output.
Difficulty 1/5 · 100 coins + a small bonus on first completion today
False. Output below potential is a recessionary gap. An inflationary gap is output above potential, which pushes prices up.
Match each equilibrium to its gap.
Difficulty 2/5 · 140 coins + a small bonus on first completion today
Compare the AD-SRAS crossing with LRAS to name the gap.
A worked case
- Worked idea. LRAS (potential output) stands at 1,000b. AD and SRAS cross at 920b.
- Because 920 is less than 1,000, the economy has a recessionary gap of 80b.
- It is producing 80b below its sustainable capacity, so unemployment is above the natural rate.
- Had the crossing been at 1,060b, it would instead have an inflationary gap of 60b.
Potential output (LRAS) is 1,000 and AD-SRAS cross at 920. What is the output gap? (keep the sign)
Difficulty 2/5 · 140 coins + a small bonus on first completion today
Output gap = 920 − 1,000 = −80 — a recessionary gap of 80.
The AD-AS model finds short-run equilibrium where AD meets SRAS. Compare it to LRAS (potential output): equal = full employment, below = a recessionary gap, above = an inflationary gap. The gap's size is the horizontal distance to LRAS.
Write from an output gap of minus 120
- Potential output is 1500. Short-run equilibrium is 1380.
- Find the output gap.
Long-run aggregate supply is at 1500 and short-run equilibrium is at 1380. What is the output gap, including its sign?
1380 is 120 below 1500.
What is the output gap?
Difficulty 1/5 · 100 coins + a small bonus on first completion today
Short-run output is 120 below potential.