**Q. Show the equations of the AS-AD model?**

**The equations of the AS-AD model **

To précis the AS-AD model, we can have a glance at its equations. IS-LM model was "solved" by simultaneously solving below equations

Y_{D}(Y, R) = Y

M_{D}(Y, R) = M_{S}

For Y and R. As M_{S} was exogenous, we had two equations and two unknown and system of equation could be solved. Solution was explained by IS-LM diagram.

In AS-AD model, situation is slightly more complicated since MD now relies on three variables: Y, R and P. We can no longer solve

Y_{D}(Y, R) = Y

M_{D}(Y, R, P) = M_{S}

For Y, R and P as we have three unknowns and only two equations. We need one more equation in AS-AD model. The third equation in AS-AD model comes from the production function and the labor market. We illustrated that L depends on P and as Y_{S}relies on L, Y_{S} will depend on P. Equilibrium requires that their supply equals actual production which is Y_{S} (P) = Y. The three equations of AS-AD model are thus:

Y_{D}(Y, R) = Y

M_{D}(Y, R, P) = M_{S}

Y_{S} (P) = Y

These are to be solved for Y, R and P. Solution is explained in AS-AD diagram, where first two equations are summarized in AD curve Y_{D} (P) = Y.

Note how the three different versions of Keynesian model are related to the number of variables / equations.

- In cross model, we have only one variable (Y) and an equation: Y
_{D}(Y) = Y.
- In IS-LM model, we have two variables (Y and R) and two equations: Y
_{D}(Y, R) = Y and M_{D}(Y, R, P) = MS.
- In the AS-AD model, we have three variables (Y, R, P) and three equations: Y
_{D}(Y, R) = Y, M_{D}(Y, R, P) = M_{S}och Y_{S} (P) = Y.