Aggregate demand and supply model- basic Macro-Economatric tool

This analysis helps us studying output fluctuation and determination piece level and the inflation rate .

the quantity of output firms are willing to supply .Generally AS curve is upward sloping .Aggregate supply AS curve describes . for each given price level .

The AD curve downward sloping .Aggregate demand • AD Curve shows the combinations of the price level and the level of out put at which the goods and money markets are in simultaneously in equilibrium . .

.Determination of output and price level The interaction of aggregate demand and supply determines the equilibrium output level of and equilibrium level of price .

.How does the money supply increase the price ? Or output or both •Generally it will shifts the AD Curve and thus output and price both .

.Upward and leftward movement in the supply curve .

.The Classical supply curve It is a vertical line .

Keynesian supply curve Horizontal line .

.We call the level of output corresponding to full employment of the labor force potential GDP. Thus we can say potential GDP is exogenous to price level . Thus the AS curve moves to the right over time and the changes in the potential GDP do not depend on price level . It grows overt time as the economy accumulates resources and the technology improves .

.Vertical or horizontal is the matter of time But intermediate slopped in the midterm even in the short run it is curved and not a straight horizontal line .

AD Curve Expansionary policy or contractionary policies can shift the demand curve . .

Aggregate demand policies under alternative supply assumptions • The classical case • The Keynesian case .

side economics .Supply.

Putting AS and AD together The price level will depend on the relative shifts of both of the curve . .

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