1.) Neatly draw out the ASAD model including the names of each of the curves and...

1.) Neatly draw out the ASAD model including the names of each of the curves and the labels for each axis.

2.) the graph should demonstrate a recessionary gap. 3.)Model the classical response to the gap, including a label for each new line drawn. 4.)What are the outcomes of this process?

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Expert Solution

1.) Neatly draw out the ASAD model including the names of each of the curves and the labels for each axis.

2.) the graph should demonstrate a recessionary gap. 3.)Model the classical response to the gap, including a label for each new line drawn. 4.)What are the outcomes of this process?

As shown in the graph below, AD curve is the downward sloping curve. AS curve is the upward sloping curve and LRAS is the long run aggregate supply curve which is vertical. Price is shown on the vertical axis and Real GDP on the horizontal axis.

A recessionary gap occurs when the Actual Level of output < the Potental Level of Output.

In the graph, Actual Level of output = Y1

Potental Level of Output. = Yp

Distance Y1 to Yp is the recessionary gap.

A response could be an expansionary monetary or fiscal policy. Such policy will increase the Aggreagte demand in the economy. As a result, the AD curve shift from AD to AD1. New AD1 intersects the LRAS at point E1. At this point, the recessionary gap of Y1Yp is closed.

Outcome: Ecomomy is back to its potential level of output. It's in the long run equilibrium. There is no inflationary or recessionary gap.

**if you like the answer, then please upvote. Would be motivating for me. Thanks

Rahul Sunny answered 1 month ago

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