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1. What is on the horizontal axis and the vertical axis of the AD-AS graph? Or explain what Y and P are, and how they are mea
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Answer #1

1.

In AD-AS diagram, it is real GDP or output at the horizontal axis and price level at the vertical axis. Here, Y is real output and P is price level in the economy. Y is measured in terms of real GDP and it is at the equilibrium where AD intersects AS. Price level is the price at the given level of real output produced. Price level is measured in terms of GDP deflator or CPI.

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2.

AE model is given by Keynes that can be used to measure the gaps in real output and potential output and resulting government intervention. In contrast to it, AD-AS model tells the real GDP produced by the economy at the equilibrium at a particular price level. But, AE model does not exhibit price level and it shows autonomous expenditure. But, As-AD model does not show autonomous expenditure.

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3.

It is the increase in unemployment and resulting decrease in aggregate demand that has led the recession to happen. In this recession, the price decreases as well as real GDP also decreases at the new equilibrium.

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4.

It is the stagflation that took place due to the AS curve shifting to the left and causing rise in price. It also increases unemployment rate and recession takes place in the economy. So, stagflation has created in the economy.

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