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Potential GDP in the Aggregate Demand Aggregate Supply Model

by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy

How does Potential GDP affect the Aggregate Demand Aggregate Supply Model? In the aggregate demand/aggregate supply model, we show potential GDP as a vertical line. Neoclassical economists who focus on potential GDP as the primary determinant of real GDP argue that...

Growth and Recessions – Aggregate Supply and Demand Model

by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy

What causes Growth and Recessions in the Aggregate Demand – Aggregate Supply Model? In the AD/AS diagram, long-run economic growth due to productivity increases over time will be represented by a gradual shift to the right of aggregate supply. The vertical line...

Keynesian, Intermediate, and Neoclassical Zones

by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy

What are the Keynesian, Intermediate, and Neoclassical Zones in the Aggregate Supply Aggregate Demand Model? We can use the AD/AS model to illustrate both Say’s law that supply creates its own demand and Keynes’ law that...

Keynesian Perspective – Aggregate Demand

by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy

What is the Keynesian Perspective of Aggregate Demand?  The Keynesian perspective focuses on aggregate demand. The idea is simple: firms produce output only if they expect it to sell. Thus, while the availability of the factors of production determines a nation’s...

Recessionary and Inflationary Gap

by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy

What is the Recessionary and Inflationary Gap? Keynes argued that, for reasons we explain shortly, aggregate demand is not stable—that it can change unexpectedly. Suppose the economy starts where AD intersects SRAS at P0 and Yp. Because Yp is potential output, the...
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