# One of the uses of economic models is to predict what will happen in different situations. The AS/AD

Aug 15th, 2016
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One of the uses of economic models is to predict what will happen in different situations. The AS/AD model can be used to predict what will happen to Real GDP and the Price Level (inflation) given a scenario. Presume a Zombie Apocalypse will occur. Describe how it will affect one of the major economic variables (consumption, investment, government expenditures, imports and exports, capital, profits, labor force, banking, money...) Will the affect primarily change AS or AD? Why and How? What would be the expected affect on Real GDP and the Price Level? You may do this for 2 different economic variables.

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Answer-------------------------One of the uses of economic models is to predict what will happen in different situations.The AS/AD model can be used to predict what will happen to Real GDP and the PriceLevel (inflation) given a scenario.Changes in the AD-AS Macroeconomic EquilibriumOne explanation of the business cycle is that the aggregate demand curve moves along astationary aggregate supply curve. The next step in our analysis therefore is to shift theaggregate demand curve along the three ranges of the aggregate supply curve and observe theimpact on the real GDP and the price level. As the macroeconomic equilibrium changes, theeconomy experiences more or fewer problems with inflation and unemployment.Keynesian RangeKeyness macroeconomic theory offered a powerful solution to the Great Depression.Keynes perceived the economy as driven by aggregate demand, and Exhibit 8(a)demonstrates this theory with hypothetical data. The range of real GDP below \$6 trillion isconsistent with Keynesian price and wage inflexibility. Assume the economy is inequilibrium at E1, with a price level of 100 and a real GDP of \$4 trillion. In this case, theeconomy is in recession far below the full-employment GDP of \$10 trillion. The Keynesianprescription for a recession is to increase aggregate demand until the economy achieves fullemployment. Because the aggregate supply curve is horizontal in the Keynesian range,demand creates its own supply. Suppose demand shifts rightw

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