Using the AD-AS model, explain inflation, unemployment and economic growth.

1. 1 · Define AD and its components. AD = C + I + G + (X − M); slopes down because of wealth, interest rate and trade effects.
2. 2 · Define SRAS and LRAS. SRAS slopes up as wages are sticky; LRAS is vertical at potential output.
3. 3 · Draw the equilibrium. [Diagram: AD, SRAS and LRAS; short-run equilibrium below potential output showing a recessionary gap]
4. 4 · Inflation.
   • Demand-pull: AD shifts right near capacity
   • Cost-push: SRAS shifts left (oil, exchange rate, wages)
5. 5 · Unemployment. AD falls or stays low, leaving output below potential (example: Y = 600 vs potential 650).
6. 6 · Economic growth. LRAS shifts right with more capital, skills and technology: higher output without inflation.
7. 7 · Sri Lankan business link. Oil price rises and rupee depreciation are classic cost-push shocks for an import-dependent economy.
8. 8 · Conclude. The AD-AS model explains the three main macro problems in one diagram and shows which policy suits each.

Scoring tip: Use three small diagrams (demand-pull, cost-push, growth) rather than one crowded one.