AD-AS-LRAS Model

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.