Macroeconomic Objectives and Theory (Unit 4 Topic 1)  

How to use the interactive model

• use the sliders (or drag curves) to shift the AD, Short-Run AS and Long-Run AS curves

• or press the 'try a scenario' button

• observe the changes in price level and output

​​
Why is this stuff important to know?
The neoclassical version of AD / AS model is helpful to distinguish short-run from long-run aggregate supply (SRAS and LRAS).
 
Where the Keynesian AS curve fits the SRAS and LRAS into one curve, the distinction in this model helps to give a clearer picture of the LRAS as representing the maximum output of an economy at a point in time, regardless of price (aka the Production Possibilities curve!). 

Trade equilibrium will occur at intersect of SRAS and AD - this will determine quantity and price level. The relative position of trade in relation to LRAS can then determine the position of the economy on the economic cycle contracting or expanding (based on whether we are trading the total available supply or not). 

A shift to the right (increase in LRAS) represents structural economic growth - a sustained increase in the level of production output in the economy. This occurs when there is an improvement in the quality and/or quantity of resource inputs (factors of production).