ad-as model

• Total quantity of national output on horizontal axis, general price level on vertical axis as this relates to prices of all domestically produced goods and services also known as the GDP deflator
• AD=C + I + G + X - M
• Slopes downwards due to income effect and substitution effect the bigger these are the more elastic the curve will be. Slope is also dependent on multiplier
• Factors shifting AD curve right- increase in consumption, investment, gov expenditure exports or decrease in imports. This could be through improved business and consumer confidence, fall in interest rates, increase in money supply, increase in gov expenditure, reduction in taxes, depreciation of domestic currency, increase in wealth from stock market and property prices
• Limiting SRAS curve- diminishing returns, growing shortages of certain variable factors.

   Rising costs explain upward steeping. More steeply costs rise less elastic  
• Factors shifting AS curve right- anything that causes profits of firms to increase such as a fall in wages, reduction in cost of non-labour inputs, rise in productivity, appreciation of exchange rate
• Extreme AS curve keynesian view- price level is fixed increases in ad lead to increase in output not price level, only when full employment level of income is reached will increases in ad lead to rise in price level
• Extreme AS curve monetarist view- economy is always closer to full employment so increase in AD rises the price level, A more or less vertical at full employment level of income
• Moderate view AS curve- positively sloped, relatively flat at low level of output becomes steeper as output increases and approaches full employment levels of output. Increase in AD increases both the price level and real income or output in short run, effect of price level less significant at low level of output
• Increase in AD- fall in interest rates, rise in prices with increases in real income, economy would shift to right 

  Decrease in AD- rise in interest rates, fall in prices decrease in real income, economy would shift left 

  Increase in SRAS- rise in output, fall in prices economy shift right 

  Decrease SRAS- fall in output, rise in prices, economy shift left
• Demand pull inflation- increase in AD (shifts right) causing price rise, shift left of SRAS, workers demand more wages, further increase in AD, price continue rising, shift more left SRAS
• Cost push inflation- continuous shifts of SRAS upwards to the left, output and employment fall, AD rises may be due to gov policies to halt falling employment, or central bank could inflation target, AD curve shift left
• Adaptive expectations- economic agents look to past when determining wage rises therefore when AD changes wages do not but real wages do therefore firm takes on more workers and expand output
• Rational expectations- economic agents look forward when determining wage rises, when AD changes wages immediately change, price and wages rise by same amount so real wages are unchanged