Unit 3 Notes - AS/AD Model

The AS/AD Model - The equilibrium of AS and AD determines current output (GDPr) and the Price Level (PL)

• Full Employment equilibrium exists where AD intersects SRAS and LRAS at the same point 
• Recessionary Gap - A recessionary gap exists where equilibrium occurs below full employment
• Inflationary Gap - An inflationary gap exists when equilibrium occurs below full employment 

3 Ranges of Aggregate Supple

1. Horizontal or Keynesian Supply - A lot of unemployed resources which creates a recession or depression. It includes only levels of real GDP that are less than the full employment output
2. Intermediate Goods - Resources are getting closer to the full employment level which creates pressure on wages and prices
3. Classical or Vertical Range - This is where real GDP at a level with unemployment at the full employment level and where any increase in demand will result in only increases in prices. The economy is unable to produce any more goods and services for a sustainable period of time