Question

Draw and carefully describe a graph that utilizes the Aggregate Demand/Aggregate Supply model that would illustrate the current state of the aggregate economy in the United States as of July 2020. The Aggregate Demand/Aggregate Supply Model is first introduced in Chapter 112 of your text and is further explicated in Chapters 12 and 13. Make sure that you explain your graph in your own words.

Answer 1

Currently, most countries in the world are witnessing a recession. Same is the case with USA.

As per data available, both the demand side and the supply side have suffered.

As compared to the potential GDP, the current GDP is quite less. This is because AD and AS are intersecting at a point to the left of potential GDP.

In the given diagram, SRAS and AD intersect at a point which leads to P and Y. Here, Y is less than the potential Y* (Y* is the long-run potential GDP of the country denoted by LRAS).

Such a situation is called a recessionary gap.

The government has made many efforts to close this gap, through fiscal and monetary policy.

Efforts have to be made to shift both AD and SRAS to the right. At present, the efforts are directed more towards AD.