ADAS Review

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AD/AS Review
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Economic Models

• Simplification of reality like models of
  airplanes
• Key idea in AD/AS model
• Use demand and supply to explain . . .
• Level of output (Y) and
• Price level (CPI)
• Once we know the level of actual output in
  relation to potential output, we can assess the
  state of the economy
• Recessionary gap (unemployment)
• Inflationary gap (price inflation)

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The language of economic theory

• The use of graphs Graphish
• They have simple rules in the context of AD/AS.
• Rule 1 If only the CPI changes, then there is
  movement along the AD, SAS and LAS curves
• Rule 2 If anything else (relevant) changes, it
  will shift the appropriate curve.

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Three possible equilibriums
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Classical vs. Keynesian
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Interpreting the economy