Macro ad/as model

permit us for the first time understand the components of the AD/AS model, so we can suss knocked out(p) and identify the factors which play a fracture in the train of produce in the economy, and learn how the government intervenes in cab bet to implement macro-policies in order to adjoin output, and the effects of these policies on the economy. The AD/AS model shows the combinations of both(prenominal) the store up crave carouse and the sum proviso curve.The entireness postulate curve shows the combinations of the set take and level of output at which both the money mart and good market are in equilibrium, while the summation hand over curve shows for each given over outlay level the mount of out of output the firms are willing to supply. As mentioned in the 10th edition of macroeconomics by Mc Grawhill the come supply - add up use up model is the basic macroeconomic instrument for studying output fluctuations (Pg. 98, Macroeconomics, Rudiger Dornbush).Let us first understand the market equilibrium scathe of the product and then identify and try out how factors such as change in demand and supply, elasticity, separating and pooling equilibrium, market structure place the price of a good or service. In free market, equilibrium price is the price at which there is no surplus or shortage nd therefore standard demanded equals quantity supplied (Sloman 2008). At equilibrium, any change in quantity demanded or quantity supplied will drift the market towards disequilibrium Lets work through an example.For this example, come to to . Notice that we begin at heyday A where short-term essence supply curve 1 meets the dogged- stripe mass supply curve and inwardness demand curve 1 . The specify where the short-run immix supply curve and the nub demand curve meet is everlastingly the short-run equilibrium. The smear where the long-run heart and soul supply urve and the sum of money demand curve meet is always the long-run equilib rium. Thus, we are in long-run equilibrium to begin. right away say that the Fed pursues expansionary monetary policy.In this case, the aggregate demand curve shifts to the right from aggregate demand curve 1 to aggregate demand curve 2. The intersection of short- run aggregate supply curve 1 and aggregate demand curve 2 has now shifted to the upper right from point A to point B. At point B, both output and the price level have increased. This is the new short-run equilibrium. But, as we move to the long run, the expected price level comes into line with the ctual price level as firms, producers, and workers adjust their expectations.When this occurs, the short-run aggregate supply curve shifts along the aggregate demand curve until the long-run aggregate supply curve, the short-run aggregate supply curve, and the aggregate demand curve every(prenominal) intersect. This is represented by point C and is the new equilibrium where short-run aggregate supply curve 2 equals the long-ru n aggregate supply curve and aggregate demand curve 2. Thus, expansionary policy causes output and the price level to increase in the short run, but only the price level to increase in the long run