You can read about the AS-ED model at this link... as-ed model
Basically, AS is understood as a normal aggregate supply function. Holding all else constant, if inflation was to rise, GDP production would rise. However, the ED (effective demand) function differs from the normal AD (aggregate demand) function in that ED shows the effective demand limit upon production.
Let me show the updated graph and explain a bit further...
For the past quarters, real GDP has been moving sideways at an inflation rate below 2%. The ED functions have been pointed to a real GDP limit between $16.1 and $16.2 trillion. That is where the ED functions were crossing the path of real GDP. Then towards the second half of 2014, real GDP reached $16.1 trillion. At that point, one of three things would have had to happen.
- Real GDP would have blown right through the ED limit if the ED limit was not binding.
- Effective demand would have risen to allow real GDP to keep expanding. ED balloons outward to the right. This is what we are seeing.
- If the ED limit did not rise, real GDP would have stopped expanding and a recession would start to form. We did not see this happen.
The question now is whether a recession will form. and when? Some thoughts...