ABSTRACT
The aggregate supply-aggregate demand (AS-AD) model is a complete macroeconomic model. It describes a general equilibrium involving the product market, the money market, the bond market, and the labor market. The AS-AD model generates an important distinction between the short-run and long-run behavior of the economy. In the short run, the new equilibrium level of GDP increases, as the price level. In the long run, all the markets are fully adjusted and price expectations are also fully adjusted. Either a simulative fiscal policy or a simulative monetary policy shifts the AD curve outward. At higher level of Gross Domestic Product (GDP), the AS curve will shift upward because workers revise their price expectations, which have not foreseen the price increase that resulted from the simulative policy. These upward shifts will continue until the system returns to the natural level of GDP and establishes a new long-run equilibrium.
