What is the AS-AD curve?

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The term "AS-AD curve" stands for "aggregate supply" and "aggregate demand."  Between them, these two curves can show us the price level and output level for an economy and can help us understand how that economy might change.

The axes of these curves are price level (measured by the CPI) on the vertical axis and output level (measured in real GDP) on the horizontal axis.  The AS curve generally slopes upward from left to right while the AD curve slopes downward.  The point at which they intersect shows us what the price level is and what real GDP is in the economy at equilibrium.

The shape of the AS curve tells us what might happen in the economy in the future.  A flat AS curve means that government could, by stimulating AD, increase GDP without increasing prices.  A sloping AS curve means that higher AD would increase both GDP and CPI.  Finally, a vertical AS curve means that an increase in AD would lead only to inflation.

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