Aggregate Demand

1. Aggregate demand (AD) is the total demand for final goods and
services in a given economy at a given time and price level.
Aggregate Demand Formula
2. Aggregate Demand is the total of Consumption, Investment,
Government Spending and Net Exports (Exports – Imports).
Aggregate Demand = C + I + G + (X – M). It shows the relationship
between Real GNP and the Price Level.
3. The aggregate demand (AD) curve shows the
combinations of the price level and level of output at which
the goods and money markets are simultaneously in
equilibrium.
4. The AD curve is downward-sloping because higher prices
reduce the value of the money supply, which reduces the
demand for output.
 Factors that Affect Aggregate Demand
1. Net Export Effect
When domestic prices increase, then demand for imports increases
(since domestic goods become relatively expensive) and demand for
export decreases.
2. Real Balances
When inflation increases, real spending decreases as the value of
money decreases. This shifts Aggregate Demand to the left/decreases.
3. Interest Rate Effect
Real Interest is the nominal interest rate adjusted to the inflation rate.
When inflation increases, nominal interest rates increase to maintain
real interest rates. Lower real interest rates will lower the costs of
major products such as cars, large appliances and houses; they will
increase business capital project spending because long-term costs of
investment projects are reduced.
Aggregate Demand
AD is the relationship between the quantity of output demanded
and the aggregate price level. In other words, the aggregate
demand curve tells us the quantity of goods and services people
want to buy at any given level of prices.
 Aggregate Supply
1. While, the Aggregate Supply is the total of all final goods
and services which firms plan to produce during a specific time
period. It is the total amount of goods and services that firms are
willing to sell at a given price level in an economy.
2. There are two views on Long Run Aggregate Supply, the
Monetarist view and the Keynesian view. The curve is upward
sloping in the short run and vertical, or close to vertical, in the
long run.
3. Investment, technology changes that result in productivity
improvements and positive institutional changes can increase
short-run and long-run aggregate supply. Some factors can only
affect Aggregate Supply in the short run.
 Aggregate Supply
1. Aggregate Supply (AS) is the relationship between the quantity
of goods and services supplied and the price level.
2. Because the firms that supply goods and services have flexible
prices in the long run but sticky prices in the short run, the
aggregate supply relationship depends on the time horizon.
3. aggregate supply (AS) curve describes, for each given price
level, the quantity of output firms are willing to supply.
4. In the short run the AS curve is horizontal (the Keynesian
aggregate supply curve); in the long run the AS curve is vertical
(the classical aggregate supply curve).
5. The classical aggregate supply curve is vertical, indicating that
the same amount of goods will be supplied whatever the price
level.
5. The classical supply curve is based on the assumption that the
labor market is in equilibrium with full employment of the labor
force.
6.If the idea that the aggregate supply curve is vertical in the long
run makes you uncomfortable, remember that the term ―price
level‖ here means overall prices.
7. In a single market, manufacturers faced with high demand can
raise the price for their products and go out and buy more
materials, more labor, and so forth.
Long-Run Aggregate Supply Curve