Changes in AD/AS & Output Gap

Changes in AD

The 3 key influences on the effect of a change in AD are: the size of the initial change, the size of the multiplier effect and the original level of economic activity.

- If the economy is initially operating with considerable spare capacity, an increase in AD is likely to raise the output of the economy, reduce unemployment and leave the price level unchanged.

- A rise in AD may increase both output and the price level. This outcome will occur if either the economy moves from a position of significant spare capacity to one where there are shortages of resources, or it moves from one where shortages are already being experienced to one where there are even greater shortages. 

- If the economy is already operating at the full employment level, with no spare capacity, an increase in AD will be purely inflationary.

Changes in AS

The effects of changes in AS will depend on the size od the change and the initial level of economic activity.

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