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AD-AS Model of Fighting Recession

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Assume the economy is in a recession. Describe an adjustment process using AD and AS analysis that will ensure that the economy will return to full employment. How can the government speed up this process?

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Solution Summary

Provides a simple analysis of how to get out of a recessionary gap using the aggregate demand/aggregate supply model.

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There are a couple of things that you have to keep in mind before answering this question: what led to the recessionary gap and how to get out of that. You say that the economy is in recession so I will explain what to do using both situations: the recession occurred due to a fall in AD or the recession occurred due to a fall in SAS.

If the recession occurred due to a fall in AD, that means one of the components of AD, Private Consumption, Gross Domestic Investment, Government Expenditures, or Exports fell. The most likely cause for major economies is a fall in Private Consumption (though ...

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