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Chapter 24: Problem 20

What is on the horizontal axis of the AD/AS diagram? What is on the vertical axis?

Short Answer

Expert verified
The horizontal axis of the AD/AS diagram represents the real GDP (Real Output), while the vertical axis represents the Price Level.

Step by step solution

01

Identification of Horizontal Axis

The horizontal axis of the AD/AS diagram represents the real output or the real GDP (Gross Domestic Product) of an economy. Real GDP is the total value of all final goods and services produced in an economy adjusted for the changes in price level (i.e., inflation or deflation). It is a measure of an economy's overall output and is used to show the quantity of goods and services demanded and supplied in an economy.
02

Identification of Vertical Axis

The vertical axis of the AD/AS diagram represents the price level, which can be measured using an index such as the Consumer Price Index (CPI) or the GDP deflator. The price level is used as a representation of the overall inflation or deflation in an economy. A higher price level represents a higher average level of prices for goods and services in an economy, while a lower price level represents a lower average level of prices. In summary: - Horizontal Axis: Real GDP (Real Output) - Vertical Axis: Price Level

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Most popular questions from this chapter

On a microeconomic demand curve, a decrease in price causes an increase in quantity demanded because the product in question is now relatively less expensive than substitute products. Explain why aggregate demand does not increase for the same reason in response to a decrease in the aggregate price level. In other words, what causes total spending to increase if it is not because goods are now cheaper?

A policymaker claims that tax cuts led the economy out of a recession. Can we use the AD/AS diagram to show this?

How would a dramatic increase in the value of the stock market shift the AD curve? What effect would the shift have on the equilibrium level of GDP and the price level?

Some politicians have suggested tying the minimum wage to the consumer price index (CPI). Using the AD/AS diagram, what effects would this policy most likely have on output, the price level, and employment?

How is pressure for inflationary price increases shown in an AD/AS model?
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