# Answer on Economics of Enterprise Question for Babu

Question #15161

Using the AD-AS model show how the Australian economy has continued to expand year after year. What are the macroeconomic dangers facing Australia? That is, are there any dark clouds, be they domestic or international ones, which could threaten the Australian economy.

Expert's answer

The PCMS Graphical Analysis Module was specifically designed to allow fast and

efficient data manipulation and representation in a graphical output of piping

circuits and TMLs thus adding a visual representation of the calculation and

forecasting abilities within PCMS.

AD-AS MODEL: An economic model relating the price level and real production that is

used to analyze business cycles, gross domestic product, unemployment,

inflation, stabilization policies, and related macroeconomic phenomena. The

AS-AD model, inspired by the standard market model, captures the interaction

between aggregate demand (the buyers) and short-run and long-run aggregate

supply (the sellers).

AD-AS ANALYSIS: An economic model relating the price level and real production that is

used to analyze business cycles, gross domestic product, unemployment,

inflation, stabilization policies, and related macroeconomic phenomena. The

AS-AD model, inspired by the standard market model, captures the interaction

between aggregate demand (the buyers) and short-run and long-run aggregate

supply (the sellers).

Professors need a relatively simple model to demonstrate to students the effect of macro

policy on the economy. They need to be able to show graphically the effects of

shifts in government spending, taxes, and the money supply on important

macroeconomic variables such as real output, interest rates, and the price

level. The AE/AP model on the introductory level, and the IS/LM model at the

intermediate level, fit the bill until the price level and inflation had to be

incorporated into the core macro models. The evolution of the core macro model

to the AS/AD model occurred because the AS/AD model incorporated the IS/LM model

as well as the price level. It fit the bill—it was easy to teach, easy to

understand, easy to draw, and it conveyed the effects of monetary and fiscal

policy that most economists saw as reasonable.

Problems with AS/AD Analysis:The movement to AS/AD did not occur without objection. AS/AD

analysis has been attacked by many economists, including many in this

volume.

efficient data manipulation and representation in a graphical output of piping

circuits and TMLs thus adding a visual representation of the calculation and

forecasting abilities within PCMS.

AD-AS MODEL: An economic model relating the price level and real production that is

used to analyze business cycles, gross domestic product, unemployment,

inflation, stabilization policies, and related macroeconomic phenomena. The

AS-AD model, inspired by the standard market model, captures the interaction

between aggregate demand (the buyers) and short-run and long-run aggregate

supply (the sellers).

AD-AS ANALYSIS: An economic model relating the price level and real production that is

used to analyze business cycles, gross domestic product, unemployment,

inflation, stabilization policies, and related macroeconomic phenomena. The

AS-AD model, inspired by the standard market model, captures the interaction

between aggregate demand (the buyers) and short-run and long-run aggregate

supply (the sellers).

Professors need a relatively simple model to demonstrate to students the effect of macro

policy on the economy. They need to be able to show graphically the effects of

shifts in government spending, taxes, and the money supply on important

macroeconomic variables such as real output, interest rates, and the price

level. The AE/AP model on the introductory level, and the IS/LM model at the

intermediate level, fit the bill until the price level and inflation had to be

incorporated into the core macro models. The evolution of the core macro model

to the AS/AD model occurred because the AS/AD model incorporated the IS/LM model

as well as the price level. It fit the bill—it was easy to teach, easy to

understand, easy to draw, and it conveyed the effects of monetary and fiscal

policy that most economists saw as reasonable.

Problems with AS/AD Analysis:The movement to AS/AD did not occur without objection. AS/AD

analysis has been attacked by many economists, including many in this

volume.

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