Answer to Question #100059 in Macroeconomics for Tiffany

Question

a. The AD/AS model describes changes in the economy by relating real GDP (output) and the price level.
(i) Compare and contrast the Keynesian portion of the AD/AS model with the classical portion of the AD/AS model, and explain how the level of production is determined in each situation. Use graphs to explain your answer.
Answer:

(ii) Compare and contrast changes in aggregate demand and changes in aggregate supply in the AD/AS model. Use graphs to explain your answer.

Answer 1

(i) In the Keynesian portion of the AD/AS model the AS curve is an upward-sloping curve, so the higher is the price level, the more output is produced, but in the classical portion of the AD/AS model the AS curve is a vertical line, which means, that the output is the same at different price levels.

(ii) Changes in aggregate demand mean that the AD curve shift either to the left or to the right, changing both price level and output in the same direction. But changes in aggregate supply in the AD/AS model mean, that the AS curve shift either to the left or to the right, changing price level and output in opposite directions.