Final answer:
The real interest rate at which the demand for goods and services equals the natural level of output in the dynamic AD–AS model, absent any shocks, is known as the natural interest rate. Below potential output, the Keynesian AD/AS Model suggests increases in AD raise output without price level changes, whereas at potential, price levels would rise instead of output.
Step-by-step explanation:
In the dynamic AD–AS model, the real interest rate at which the demand for goods and services equals the natural level of output, in the absence of any shocks, is known as the natural interest rate. Essentially, this is the rate at which the output of the economy is at its potential, and unemployment is at its natural rate. In this state, the economy is neither contracting nor expanding too quickly, but is growing at a sustainable pace.The Keynesian AD/AS Model portrays the Short-Run Aggregate Supply (SRAS) curve as horizontal up to the point where the economy reaches its potential output, and vertical at potential output.
Thus, below potential output, increases in Aggregate Demand (AD) increase output without affecting prices, whereas at potential output, increases in AD would lead to higher prices rather than higher output. This is a way to visualize how variations in AD affect the state of the economy.If the economy grows at the same rate as the aggregate demand, the AD/AS model would predict that there is no change in inflation rate, provided that other conditions remain constant. Therefore, if growth and AD are both at 3%, inflation would remain stable according to this model.