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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

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?

What is Say鈥檚 law?

The AD/AS model is static. It shows a snapshot of the economy at a given point in time. Both economic growth and inflation are dynamic phenomena. Suppose economic growth is 3% per year and aggregate demand is growing at the same rate. What does the AD/AS model say the inflation rate should be?

What is Keynes鈥� law?

Will the shift of SRAS to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of SRAS to the left?
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