Macroeconomic Objectives and Theory (Unit 4 Topic 1)  

How to use the interactive model

• use the sliders (or drag curves) to shift the aggregate demand and supply curves

• or press the 'try a scenario' button

• observe the changes in in price level and Income (Y) / output

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Why is this stuff important to know?
The Keynesian version of AD / AS model helps to visualise the relative position of the economy on the economic cycle, and to then infer output levels, price levels and employment levels.

It is instructive to keep an eye on the three zones of the AS curve: 

• When an economy is in trough AD will intersect AS along the flat section - where even if AD was to then shift right (increase), output and employment levels can increase, but price level (inflation) stays pretty much the same.

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• The curved section (intermediate zone) is where an increase in AD will result in increase output and employment, but some price level pressure starts to appear. This is where economies tend to function - maybe this could be the RBA 'sweet spot' of 2-3 % inflation.

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• The steep (vertical) section of AS (classical zone) helps to visualise a situation where an economy is producing at full employment of resources. So output can't increase, and any further increase in AD will only create further inflationary pressure.