Evidence and data
Use potential output, inflation, utilization, wages, and supply-shock evidence to discipline the short-run and long-run positions.
Calibration or measurement
Short-run supply slope and demand slope encode price rigidity and demand sensitivity. Treat them as scenario parameters unless estimated from a specified system.
Boundaries
- Supply shocks can move prices and output in opposite directions.
- The diagram does not identify expectations without extra assumptions.
- Long-run adjustment is conceptual unless a wage-price law is supplied.
Use guidance
- When sufficient
- Diagnostic shell over a single dominant friction. Useful for talking about output gaps, inflation pressure, and the direction of demand-side shocks.
- When sketch only
- Do not use as a structural model. SRAS is a reduced-form summary of whichever pricing friction dominates. Different microfoundations (sticky wages, sticky prices, information frictions, menu costs, indexation, expectations) produce different slopes and shifts.
- When to switch
- Switch to a model with the underlying friction made explicit (NKPC for sticky prices, sticky-information for rational inattention, indexation models for backward-looking wage setting) when the question is about the SOURCE of the inflation response.
- Falsification signal
- Sustained co-movement of output and prices in opposite directions during a pure demand shock contradicts the diagnostic. Stagflation-style episodes indicate a supply-side rotation that AD-AS cannot identify without channel-specific structure.