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Chapter 11: 20 (page 291)

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

Short Answer

Expert verified

Real GDP and price level are labeled horizontally and vertically on the AD and AS curves, respectively.

Step by step solution

01

Concept introduction

Aggregate demand curve depicts the link between the current price level in the economy and GDP when both the goods and money markets are in equilibrium.

Aggregate supply represents the total output of goods and services that an economy could deliver at a particular price level.

02

Explanation


The vertical axis represents price level, and the horizontal axis represents GDP, as seen in the diagram. The equilibrium level of price and output is determined by the intersection of aggregate demand and aggregate supply.

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Most popular questions from this chapter

Suppose the Federal Reserve begins to increase the supply of money at an increasing rate. What impact would that have on GDP, unemployment, and inflation?

Do neoclassical economists believe in Keynes鈥� law or Say鈥檚 law?

If the economy is operating in the Keynesian zone of the SRAS curve and aggregate demand falls, what is likely to happen to real GDP?

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?

Review the problem in the Work It Out titled "Interpreting the AD/AS Model." Like the information provided in that feature, Table 11.2 shows information on aggregate supply, aggregate demand, and the price level for the imaginary country of Xurbia.

Price Level
AD
AS
110
700
600
120
690
640
130
680
680
140
670
720
150
660
740
160
650
760
170
640
770

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 50 at 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?
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