5 Steps to a 5 AP Macroeconomics 2019

114 ❯ Step 4. Review the Knowledge You Need to Score High

Shifts in AD

Let’s   assume  again   that    the SRAS    curve   has three   stages, nearly  horizontal, upward  sloping,

and nearly vertical. The economy is currently in equilibrium but at a very low recessionary

level of real GDP. If AD increases from AD 0 to AD 1    in   the    nearly  horizontal  range   of   SRAS,

the price level may only slightly increase, while real GDP significantly increases and the

unemployment rate falls.

If AD continues to increase to AD 2 in the upward­sloping range of SRAS, the price

level begins to rise and inflation is felt in the economy. This demand-pull inflation is the

result of rising consumption from all sectors of AD.

If AD increases much beyond full employment to AD 3 , inflation is quite significant

and real GDP experiences minimal increases. Figures 9.9, 9.10, and 9.11 illustrate how

rising AD has different effects on the price level and real GDP in the three stages of

short­run AS.

SRAS

Real GDP

Price

Level

GDPf

PL 0

AD 1

AD 0

LRAS

Figure 9.9

Figure 9.10

SRAS

Real GDP

Price

Level

GDPf

PL 0

PLf

AD 2

AD 1

LRAS

If aggregate demand weakens, we can expect the opposite effects on price level and real

GDP. In fact, one of the most common causes of a recession is falling AD as it lowers real

GDP and increases the unemployment rate. Inflation is not typically a problem with this

kind of recession, as we expect the price level to fall, or deflation, with a severe decrease in

AD. This is seen in Figure 9.12.