Business Cycles and Growth in the AD–AS Model | Macroeconomics

Business cycles represent the slowing down, declining and speeding up of the economy, or more formally, recessions and expansions. The AD-AS model gives us one way to understand business cycles. Recessions occur as a result of negative demand or supply shocks, which cause the equilibrium level of real GDP to fall substantially below potential GDP, as occurred at the equilibrium point E1 in Figure 1.

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• Tsz Kiu Eugene Chan