Adas Model and Islm Model

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Figure 5. case study in ADAS model.

In short run, as the investment increase, aggregate demand increase. As we can see in figure 5, it shifts from AD1 to AD2. The economy is now in point F. The price level increases from P1 to P2 and real GDP increase from Yp to Y2. Those price level and real GDP changes can be also revealed in given predicted data, figure 6 and 7.

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Figure 6. The price level increase from 100 to around 101.36 in short run (2017).

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Figure 7. The real GDP is predicted to increase from 100 to around 100.62 in short run (2017)

However, as we can see that in figure 6, there is an inflationary gap between Yp and Y2. In long run, unemployment falls below its natural rate, forcing employers to pay more; the increased demand for goods raises prices. Firms and workers raise their expectations about the price level, shifting SRAS to the left, in order to restore to long run equilibrium. The SRAS will shift back to the long term equilibrium by SRAS1 to SRAS2 as to restore the long run equilibrium. The equilibrium moves from point F back to potential GDP at point G, with a higher price level. The price level will increase from P2 to P3. The real GDP will decrease from Y2 to Yp. Those price level, real GDP and unemployment rate changes can be also revealed in given predicted data, figure 8, 9, 10.

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Figure 8. The price level increase from 101.36 in 2017 to around 102.55 in 2030 in long run.

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Figure 9. The real GDP is predicted to decrease from 100.62 in 2017 to around 100.22 in 2030 in long run.

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Figure 10. The unemployment rate is predicted to decrease from 4% to around 3.69% in short run and later increase from 3.69% in 2017 to 3.89% in 2030 in long run.

Conclusion

In IS-LM model, reduction in corporate tax enhance the incentive of investment, hence investment will increase, then shift IS curve rightwards.

For reduction in personal tax, it increases people’s money demand since they need to consume more. Then there is a movement on LM curve instead of a shift.

Therefore, in IS-LM model, The IS curve shift rightwards, leads to an increase in output and interest rate.

In ADAS model, reduction in personal tax enhance people’s consumption. AD shifts rightwards in short run. Price level increases and real GDP increases in short run. However, as the economy is going to restore to long run equilibrium eventually, SRAS shift leftwards, price level further increases and real GDP decreases in long run.