Dynamic AD-AS Model: Introduction: Videos & Practice Problems

The dynamic AD-AS model is an extension of the standard aggregate demand and aggregate supply framework. It accounts for economic growth over time by allowing both the long-run and short-run aggregate supply curves to shift rightward annually. This shift is due to factors such as technological advancements, increases in the labor force, and population growth. Aggregate demand also increases over time, driven by higher consumption, investment, and government spending. This model results in a new equilibrium with a higher potential GDP while maintaining a stable price level, illustrating the continuous expansion of the economy.

The dynamic AD-AS model differs from the standard AD-AS model by incorporating economic growth over time. In the standard model, long-run aggregate supply (LRAS) is held constant, assuming no long-term inflation or growth in potential GDP. In contrast, the dynamic model shifts both the long-run and short-run aggregate supply curves to the right annually, reflecting technological advancements, population growth, and other factors. Aggregate demand also increases yearly, driven by higher consumption, investment, and government spending. This results in a new equilibrium with a higher potential GDP and a stable price level, better reflecting real-world economic conditions.

In the dynamic AD-AS model, both the long-run and short-run aggregate supply curves shift to the right annually due to several factors. These include technological advancements, which improve productivity; increases in the labor force, which provide more workers; and population growth, which expands the market. Additionally, the construction of new factories and infrastructure contributes to higher potential GDP. These shifts reflect the continuous growth and expansion of the economy, leading to a higher potential GDP over time.

In the dynamic AD-AS model, aggregate demand increases over time due to several factors. Higher consumption results from rising incomes and population growth. Increased investment occurs as firms expand their businesses in a growing economy. Government spending also rises to meet the needs of a larger population and a more complex economy. These factors collectively drive the aggregate demand curve to shift to the right annually, contributing to the overall economic growth depicted in the dynamic model.

The dynamic AD-AS model explains economic expansions by showing how both aggregate supply and aggregate demand curves shift to the right over time. This rightward shift is due to factors such as technological advancements, population growth, and increased investment and consumption. As a result, the economy reaches a new equilibrium with a higher potential GDP while maintaining a stable price level. This continuous rightward shift of the curves illustrates the ongoing expansion of the economy, reflecting real-world economic growth more accurately than the standard AD-AS model.