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Chapter 24: Q 20. (page 601)

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

Short Answer

Expert verified

The vertical axis and horizontal axis show different things.

Step by step solution

01

Step 1. Definition

An AD/AS (aggregate demand/aggregate supply model) is a method of demonstrating national income calculation and price level changes.

02

Step 2. Explanation

AD/AS model represents GDP on the horizontal axis, while on the vertical axis it represents the price level. Where the AD and AS curve meets it reflects the real growth of the economy.

The price level is the price of all the goods and services only, here the intermediate goods and services will not be counted. Price level does not mean inflation rate it is different, because the price level is indexed numbers and the inflation rate is a percentage.

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Most popular questions from this chapter

Why would an economist choose either the neoclassical perspective or the Keynesian perspective, but not both?

If households decide to save a larger portion of their income, what effect would this have on the output, employment, and price level in the short run? What about the long run?

If new government regulations require firms to use a cleaner technology that is also less efficient than what they previously used, what would the effect be on output, the price level, and employment using the AD/AS diagram?

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?

Review the problem in the Work It Out titled

"Interpreting the AD/AS Model." Like the information provided in that feature, Table 24.2shows information on aggregate supply, aggregate demand, and the price

level for the imaginary country of Xurbia.

a. Plot the AD/AS diagram from the data. Identify

the equilibrium.

b. Imagine that, as a result of a government tax

cut, aggregate demand becomes higher by 50at

every price level. Identify the new equilibrium.

c. How will the new equilibrium alter output? How

will it alter the price level? What do you think

will happen to employment?
See all solutions

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