The AD-AS model explains how full employment can be reached from a situation of deep recession, assuming no fiscal policy stimulus. The underlying assumption of this theory is that when the economy improves, that this will have an impact on employment. The model therefore assumes a pre-globalization world where increases in aggregate supply on the part of companies in the U.S. will actually be made by U.S. workers. The thesis statement for this paper is that technological innovation is the most likely means by which the economy can return to full employment under the circumstances described.

In this situation, without fiscal stimulus, the economy is not going to see any increase in aggregate demand because of persistent high unemployment and likely fears about the state of the economy. Businesses are likely to begin this recession with excess capacity, keeping them from making investments as well. However, the economy will...
[ View Full Essay]