Equilibrium in the AD-AS Model
| English | Chinese | Pinyin |
|---|---|---|
| AD-AS model | 总需求-总供给模型 | zǒng xū qiú - zǒng gōng jǐ mó xíng |
| short-run macroeconomic equilibrium | 短期宏观经济均衡 | duǎn qī hóng guān jīng jì jūn héng |
| full-employment equilibrium | 充分就业均衡 | chōng fèn jiù yè jūn héng |
| recessionary gap | 衰退缺口 | shuāi tuì quē kǒu |
| inflationary gap | 通货膨胀缺口 | tōng huò péng zhàng quē kǒu |
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:
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:
Output below potential means high unemployment — a recessionary gap.
When equilibrium output equals potential output, the economy is at ______-employment equilibrium.
At full employment, AD, SRAS, and LRAS all meet at one point with no gap.
An inflationary gap means equilibrium output is above potential output.
Above potential, the economy over-produces beyond what is sustainable, pushing prices up.
Match each equilibrium to its gap.
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)
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.