Final answer:
The AD curve represents the demand for goods and services, while the SRAS curve represents the output firms are willing to produce. Short-run equilibrium occurs when AD equals SRAS, while long-run equilibrium occurs at potential GDP. Demand pull and cost-push inflation can be shown using the AD-SRAS-LRAS curves.
Step-by-step explanation:
1. Explanation of AD and SRAS curve derivation:
The Aggregate Demand (AD) curve represents the total demand for goods and services in an economy at different price levels. It is derived from the components of GDP, including consumption, investment, government spending, and net exports. The Short-Run Aggregate Supply (SRAS) curve represents the total output firms are willing to produce at different price levels in the short term. It is influenced by factors such as input prices, available resources, and productivity.
2. Differences between SRAS and LRAS:
The SRAS curve represents the short-term relationship between the price level and the quantity of output, while the LRAS curve represents the long-term relationship between the price level and the potential GDP. SRAS is influenced by factors like labor and resource availability, while LRAS is determined by the economy's productive capacity and technology.
3. Short- and Long-Run Equilibrium:
In the short run, equilibrium occurs when the quantity of aggregate demand equals the quantity of aggregate supply, determining the price level and output level. In the long run, equilibrium occurs at the potential GDP level, where the LRAS curve intersects with the AD curve.
4. Inflation Equation:
The inflation equation calculates the rate of inflation using the Consumer Price Index (CPI). It is measured as the percentage change in the CPI over a specific period of time.
5. Demand Pull Inflation:
Demand pull inflation occurs when the aggregate demand exceeds the aggregate supply, causing upward pressure on prices. This can be depicted using the AD-SRAS-LRAS curves, where a rightward shift in the AD curve increases output and the price level.
6. Cost Push Inflation:
Cost push inflation occurs when the production costs for firms increase, leading to higher prices and a decrease in the quantity of output. This can be shown on the AD-SRAS-LRAS curves with a leftward shift in the SRAS curve.
7. Positive and Negative Output Gap:
A positive output gap occurs when the economy is producing above its potential GDP, leading to upward pressure on prices and inflation. A negative output gap occurs when the economy is producing below its potential GDP, resulting in lower prices and unemployment. These gaps can be illustrated using the AD-SRAS-LRAS curves.