Classical ADAS Analysis

• • Aggregate Demand - Consumption, Investment, Government Spending, Imports, Exports.
  • SRAS - Cost of production (Wages, Raw materials, Oils, Tax, Interest).
  • LRAS - Quality & Quantity of FOPs.
• Short Run Equilibrium

  
• Classical ADAS (Boom)

  
• Classical ADAS (Recsession)

  
• Classical ADAS (Boom)


  • An increase in AD has led to a shift from AD1 to AD2.
  • This leads to the SR equilibrium sifting from (PL1,YFE1) to (PL2,YFE2). Good for firms, more output, higher prices, profits maximised.
  • This means that the economy is working beyond its full employment.
  • Workers realise inflation is creasing beyond their wages so demand wages are higher.
• Classical ADAS (Recession)


  • SR = FOP's are fixed
  • LR = FOP's are variable
  • Consumption falls, AD falls AD1 - AD2 causes PL1 - PL2 (recession).
  • New SR equilibrium, but now not in LRAS equilibrium. So: LRAS1 - LRAS2 or maintain LRAS equilibrium but SRAS shift (SRAS1 - SRAS2)
  • Theory: In the LR and economy will always be at the full employment level of output.