Intermediate Zone

Definition

The intermediate zone refers to the region in the Aggregate Demand/Aggregate Supply (AD/AS) model where the economy is operating at less than full employment, but output is not at its potential level. This area lies between the full employment level and the recessionary gap, representing a state of underemployment in the economy.

5 Must Know Facts For Your Next Test

1. The intermediate zone in the AD/AS model represents a situation where the economy is not operating at full employment, but output is still above the recessionary level.
2. In the intermediate zone, there is a gap between the economy's actual output and its potential output, indicating underutilization of resources.
3. Keynes' Law, which states that demand creates its own supply, is applicable in the intermediate zone, as changes in aggregate demand can influence the level of output.
4. In contrast, Say's Law, which suggests that supply creates its own demand, is not applicable in the intermediate zone, as the economy is not operating at full employment.
5. Policies aimed at increasing aggregate demand, such as expansionary monetary or fiscal policies, can help move the economy from the intermediate zone towards full employment.

Review Questions

• Explain how the intermediate zone in the AD/AS model differs from the recessionary gap and full employment levels.
  • The intermediate zone in the AD/AS model represents a state where the economy is operating at less than full employment, but output is still above the recessionary level. This means that there is a gap between the economy's actual output and its potential output, indicating underutilization of resources. In contrast, the recessionary gap occurs when the economy is producing below its potential, while the full employment level represents the maximum sustainable output the economy can achieve.
• Analyze the applicability of Keynes' Law and Say's Law in the intermediate zone of the AD/AS model.
  • In the intermediate zone, Keynes' Law, which states that demand creates its own supply, is applicable. This means that changes in aggregate demand can influence the level of output, as the economy is not operating at full employment. However, Say's Law, which suggests that supply creates its own demand, is not applicable in the intermediate zone, as the economy is not operating at full employment and there is underutilization of resources.
• Evaluate the potential policy responses that could move the economy from the intermediate zone towards full employment.
  • Policies aimed at increasing aggregate demand, such as expansionary monetary or fiscal policies, can help move the economy from the intermediate zone towards full employment. For example, the government could increase government spending or cut taxes to stimulate consumer and business spending, leading to a rise in aggregate demand. The central bank could also lower interest rates to encourage more investment and consumption, thereby increasing aggregate demand. These policies can help close the gap between the economy's actual output and its potential output, reducing the underutilization of resources and moving the economy closer to the full employment level.

Related terms

Recessionary Gap:

The recessionary gap is the difference between the economy's actual output and its potential output when the economy is in a recession and producing below full employment.

Aggregate Demand (AD): Aggregate Demand is the total demand for all final goods and services in an economy at a given time and price level.

Aggregate Supply (AS): Aggregate Supply is the total quantity of final goods and services that firms are willing to sell at different price levels in a given time period.