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AD/AS as a framework for fiscal and monetary policies

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A. Draw the aggregate demand-aggregate supply model of the macroeconomy for the short run, assuming that economy is in the expansionary phase of the business cycle. Label the aggregate demand curve as AD and the aggregate supply curve as AS. be sure to label the axes appropriately.

B. Identify and describe changes in the AS-AD graph above, that would result from cost-push inflation.

C. Identify and describe changes in the AS-AD graph above, that would result from demand-pull inflation.

D. Identify and describe changes in the AS-AD graph above, that would result from the implementation of contractionary fiscal policy.

E. Identify and describe changes in the AS-AD graph above that would result from the implementation of an easy monetary policy.

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Solution Summary

In this exercise I examine the effects of fiscal and monetary policy on equilibrium output and price (inflation) using the AD/AS model. I discuss the difference between cost push and demand pull inflation.

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Aggregate Supply and Aggregate Demand
A. Draw the aggregate demand-aggregate supply model of the macroeconomy for the short run, assuming that economy is in the expansionary phase of the business cycle. Label the aggregate demand curve as AD and the aggregate supply curve as AS. be sure to label the axes appropriately. Recall that Price for the AD/AS model refers to the general price level not the price of any particular good. Output ...

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