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macro in a nutshell
The DAD-SAS model

The DAD curve gives demand-side equilibrium income levels at different inflation rates. But as long as inflation has not been determined, income cannot be determined.

The SAS curve gives output produced at different inflation rates. Again, without knowing the inflation rate, output remains unknown.

The DAD-SAS model combines the two curves to determine unique values for the inflation rate and income in the current period.DAD-SAS model

What makes working with the DAD-SAS model a bit tricky is
first, that the position of the DAD curve depends on last period's income. So as long as income changes (say during a recession), the curve keeps moving.
Second, the position of the SAS curve depends on expected inflation. Again, as long as inflation expectations change, the curve keeps moving.

The key to working with the DAD-SAS model is to be able to position the DAD curve and to position the SAS curve properly. Once this has been mastered, the DAD-SAS model proves very useful in working out the dynamic response of a modern economy to changes in its macroeconomic environment and to monetary and fiscal policy measures of all kinds.

To see the DAD-SAS model at work,

view animated display

of the dynamic responses triggered by an increase of the growth rate of the money supply.

Further reading on pp. 195-214.


Copyright 1997-2013, Manfred Gärtner. All rights reserved.