The Aggregate Demand ‘AD’ and Long run Aggregate Supply ‘LRAS’ model illustrates the great trend of the U.S economy during the great recession in the period between 2007 and 2009. The drop of aggregate demand for commodities by consumers shifts the AD from AD1 to AD2. Moreover, households increased their personal savings due to reduction of wealth and income that contributed hugely to the shift of the curve (Kevin, 2019). Therefore, The Aggregate demand dropped from AD 1 to AD2 due to decline of consumers expenditure and increase of their personal savings due to reduction of wealth and income.
According to the model, there was a decline of Gross Domestic Product ‘GDP’ during the great recession period. GDP at equilibrium was Y1 during the period between 2007 and 2009 however the GDP drastically dropped to Y2 due to the great recession. Moreover, the decline of the GDP from the model above greatly contributed to high level of unemployment rate in the US (Andrew, 2019). The shift of GDP from Y1 to Y2 was adversely affected by the financial crisis the country experienced that led to great recession during the period. Therefore, the great recession in United States led to decline of the GDP.
The initial equilibrium level of the United States before great recession as illustrated in the model above was Aggregate demand 1’AD1’ and long run aggregate supply ‘LRAS’ at full employment. During the period between 2007-2009 there was a great recession that affected equilibrium of the country and shifted the Aggregate demand from AD1 to AD2 and prices to P1 to P2 holding LRAS constant. The new equilibrium in the United states led to low demand of commodities, high-rate unemployment and low GDP. Moreover, the shift of the aggregate demand curve to the left affects the prices of commodities due to lower consumer demand. The great recession contributed adversely to the new equilibrium in the States during the period of 2007-2009.
Andrew, H. (2019). Handbook of US Consumer Economics. Elsevier.
Kevin, E. (2019). Shut Out: How a Housing Shortage Caused the Great Recession and Crippled Our Economy. Rowman & Littlefield.