The DAD curve gives demand-side equilibrium income levels
at different inflation rates. But as long as inflation has not been
determined, income cannot be determined.
The SAS curve gives output produced at different inflation
rates. Again, without knowing the inflation rate, output remains
The DAD-SAS model combines the two curves to determine unique
values for the inflation rate and income in the current period.
What makes working with the DAD-SAS model a bit tricky is
first, that the position of the DAD curve depends on last period's
income. So as long as income changes (say during a recession), the
curve keeps moving.
Second, the position of the SAS curve depends on expected inflation.
Again, as long as inflation expectations change, the curve keeps
The key to working with the DAD-SAS model is to be able to position
the DAD curve and to position the
SAS curve properly. Once this has been mastered, the DAD-SAS
model proves very useful in working out the dynamic response of
a modern economy to changes in its macroeconomic environment and
to monetary and fiscal policy measures of all kinds.
To see the DAD-SAS model at work,
view animated display
of the dynamic responses triggered by an increase of the growth
rate of the money supply.
Further reading on pp. 195-214.