The neo classical perspective graph give more emphasis on the aggregate supply. Aggregate supply is the
total amount of goods and services that firms within an economy are willing and able to supply at any given
time at a set price. Its also a measure of the economy potential supply output also known as the “total
supply”. The SRAS meat at equilibrium point “PE,YE” with the aggregate demand curve. The aggregate
demand is the value of all goods and services demanded in the economy. It’s the total amount of spending
in the economy usually measured in years. The aggregate demand is calculated by using a formula (AD= C +
I + G + (X-M)) therefore an increase in one of these factors, for example consumption ( C) is going to lead to
an increase in the aggregate demand and will result in an outward shift of the AD curve. The increase of the
AD is going to have different effects on the economy in the short and long term. In the short term an
increase in the AD will result in a rise of the price level and the GDP (gross domestic product). The increase
of the GDP benefits the economy as employment is likely to increase as people spend more. Although in
the long term the price level will still go up, although wages will then adjust to inflation rates, resulting in a
decrease of the SRAS. In conclusion in the long run only the price will be affected. The LRAS remains vertical
because in the long run the potential output of an economy isn’t related to its price level but instead on
other factors.