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Line 5: == 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~~affect 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.

AD–IA model: Difference between revisions