๐ Topic Summary
The Aggregate Demand-Aggregate Supply (AD-AS) model helps us understand how the overall economy functions. When the economy isn't in equilibrium at its potential output, we have gaps. An inflationary gap occurs when the current equilibrium GDP is above the potential GDP, leading to inflation. A recessionary gap happens when the current equilibrium GDP is below the potential GDP, resulting in unemployment and underutilization of resources.
๐ค Part A: Vocabulary
Match the term with its definition:
- Term: Aggregate Demand (AD)
- Term: Aggregate Supply (AS)
- Term: Potential GDP
- Term: Inflationary Gap
- Term: Recessionary Gap
- Definition: The total amount of goods and services that firms are willing and able to supply at various price levels.
- Definition: The level of GDP an economy can produce when all resources are fully employed.
- Definition: The difference between current GDP and potential GDP when current GDP is above potential GDP.
- Definition: The total demand for goods and services in an economy at various price levels.
- Definition: The difference between current GDP and potential GDP when current GDP is below potential GDP.
โ๏ธ Part B: Fill in the Blanks
Complete the paragraph using the words provided: equilibrium, short-run, long-run, price level, output.
The AD-AS model shows the relationship between the overall ________ and ________ in an economy. In the ________, fluctuations in aggregate demand can lead to changes in ________ and employment. The ________ aggregate supply curve represents the economy's potential _______ when all resources are fully employed. The intersection of AD and AS determines the ________.
๐ค Part C: Critical Thinking
Imagine the economy is experiencing a recessionary gap. What fiscal and monetary policies could the government and central bank implement to close this gap? Explain how these policies would affect aggregate demand and the overall economy.