Chapter 12

Using the AD–AS Model to Analyze Economic Shocks


Understanding the focus of the AD–AS model

Encountering demand-side impacts

Shocking the supply side

Yoda said that the future is always in motion. (Actually, he said, “Always in motion is the future.”) Either way, he could just as easily have been talking about the economy. It never stands still either. Things change — things like consumer confidence, foreign demand for our goods, and government policy, to name a few. Macroeconomists often call these changes shocks. That’s partly because they can’t always predict them. But it’s partly because they are disturbances to the Aggregate Demand–Aggregate Supply (AD–AS) model that come from the outside, that is, that are not determined by the model but instead determine where the model’s equilibrium will be.

In this chapter, you discover how to use the AD–AS model to analyze different shocks as well as see how they affect key macroeconomic variables, including inflation, unemployment, and real GDP. More specifically, we discuss the following impacts:

  • On the demand side: Consumer and business confidence, fiscal and monetary policies, and the multiplier effect.
  • On the supply side: Energy shocks.

Discovering What the AD–AS Model Does and Doesn’t Explain

The importance of the AD–AS model for macroeconomics is undeniable. However, it’s equally important to realize that as with any model, it addresses some issues and not others. No single model tries to explain ...

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