Here is the updated model of the Aggregate Supply - Effective Demand (AS-ED) model as of 1st quarter 2015. Values for real GDP on the x-axis. Core inflation rate on the y-axis.
The key thing to see here is the red line that swoops down and then starts upward. It tracks the meeting point between AS and ED. When the red dots are high above real GDP (green line), there is more slack in the labor and capital markets. The red dots, according to the principles of effective demand, will fall toward GDP and then stay there or bounce back up.
As we see, effective demand bounced back up perfectly when slack was closing in on zero. The area encircled by the dashed line represents the zone where real GDP was going to reach the effective demand limit. Effective demand bounced perfectly upon this zone.
The pattern above was seen in many recessions in the past, but this time is not a recession. Effective demand has inflated since middle of last year. And will head back down later this year.
I find this so interesting.