Question

How can we use the aggregate demand and aggregate supply model to illustrate the business cycle and How can we use AD-AS model to see effect of various events on real GDP and inflation

Answer 1

Business cycles represent the slowing down, declining and speeding up of the economy, or more formally, recessions and expansions. Therefore, the AD-AS model gives us one way to understand business cycles. Recessions occur as a result of negative demand or supply shocks, which cause the equilibrium level of real GDP to fall substantially below potential GDPP. On the other hand, AD-AS helps to know how different events can lead to changes in two of our key macroeconomic indicators: real GDP and inflation.