AD/AS model

The assumption that prices are flexible means that prices

• adjust to the level of demand and supply

• can change in the long run

• are set for some period of time

• does not depend on the money supply

The assumption that prices are sticky means that prices

• have to be attached to a product

• do not change in a short run

• follow movements of demand and supply

• are fixed for some time

When the prices are flexible then the level of output depends on

• the demand

• the supply of capital and labor

• the technology

• the fiscal or monetary polity

When the prices are sticky then the level of output depends on

• the demand

• the supply of capital and labor

• the technology

• the fiscal or monetary polity

In AD/AS model the Agreggated Demand (AD) curve

• links prices with the demand

• depends on the production technology

• is downward sloping

• depends on the level of money supply

In AD/AS model the Agreggated Supply (AD) curve

• links prices with the demand

• depends on the production technology

• depends on the time horizon

• depends on the level of money supply

The Long Run Aggregated Supplay (LRAS) curve

• is vertical

• is horizontal

• assumes that prices are flexible

• assumes that prices are sticky

The Short Run Aggregated Supplay (SRAS) curve

• is vertical

• is horizontal

• assumes that prices are flexible

• assumes that prices are sticky

Suppose, the central bank decides to increase the money supply, M. According to the AD/AS model, it will result in

• an increase of production in the short run

• an increase of production in the long run

• a rise of prices in the short run

• a rise of prices in the long run

A rise of oil prices

• is a supply shock

• is a demand shock

• results in a fall of output in the short run

• results in a fall of output in the long run