AD–IA model: Difference between revisions

Revision as of 20:48, 29 January 2008

Revision as of 19:28, 15 September 2008

Line 1:

The '''ADAggregate Demand-IAInflation Adjustment model''' builds on the concepts of the [[IS/LM model]] and the [[AD-AS model]]s, essentially in terms of changing interest rates in response to fluctuations in inflation rather than as changes in the money supply in response to changes in the price level.

== The Model ==

The AD-IA model is a Keynesian method used to explain economic fluctuations. Essentially, this model is used to show undergraduate students how shifts in demand or shocks to prices can effect real GDP around potential. The model assumes that when inflation rises the interest rate rises (monetary policy rule). It also assumes that when real GDP exceeds potential, there is upward pressure on the inflation rate and vice versa.

The model features a downward-sloping demand curve (AD) and a horizontal inflation adjustment line (IA). The point where the two lines cross is equal to potential GDP. A shift in either curve will explain the impact on real GDP and inflation in the short run.

'''===Shifts in Demand'''===

A shift in demand can occur for the following reasons:

Line 23:

== Related Models ==

* [[IS-LM]]

* [[Real Business Cycle Theory]]