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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.

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