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Explaining a BOOM using the AD-AS modelThe Business Cycle or Trade Cycle is characterised by a regular cyclical pattern with four distinctive phases the expansion the peak the contraction and the troughThe peak also known as the boom phase of the cycle is characterised by the following conditions A reduction in the rate of investment spending resulting from high business costs falling business confidence and a lower expectation of profit Relatively high levels of employment with shortages of labour and particularly skilled labour Continued upward pressure on wages growth Relatively high levels of interest rates due to the demand for funds Unfavourable trends in international transactions Downward pressure on the domestic exchange rate Shortages of materials and other resources due to relatively high production levels Greater difficulty in increasing real production Relatively high levels of industrial unrest and unionemployer disputesUnlike the Keynesian model the Aggregate Demand-Aggregate Supply model functions under the assumption that levels of production income employment and prices may be determined not only by demand factors but supply factors alsoThe AD-AS model is used in illustrating the effects of changes in aggregate demand and aggregate supply on levels of output real GDP income employment and prices Because this model provides us with an understanding of how the total economy operates it can also be used in predicting future movements of economic activityAggregate Demand Aggregate Supply ModelIn relation to the boom phase of the business cycle where real output income and employment are close to peak levels the AD-AS model must show an expansion of these factors This is shown on the AD-AS model as a shift in the macroeconomic equilibrium to the right see diagram over page If this is to occur however one of the following must happen demand must increase to that point or supply must increase to that point or a combination of both supply and demand must occur to push the macroeconomic equilibrium to the right If demand increases
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