*
*
Aggregate = Total
Aggregate Demand = Total demand in the
economy
Aggregate Supply = Total supply in the economy
*
* Shows the total demand in an economy at each
price level
* Price Level = general level of prices (Measures
inflation)
* Aggregate demand is demand from each of the
sectors of the economy
*
*AD = consumption spending (c) + Investment spending (I) +
government spending (g) + net exports[exports (x) –
Imports (m)]
*If any of the components increases, then AD will increase
and cause the AD curve to shift to the right
*If any of these components decreases, the AD will
decrease and cause the AD curve to shift to the left
*
* Change in any variable in the AD equation (AD=C+ I+ G+ (X-M))
will move the AD curve itself.
Shift to the
Left
C
G X
Shift to the right
C
G
X
*
*The aggregate supply curve shows the total output
in an economy at each price level
*The aggregate supply curve is drawn assuming that
*Nominal wages (Cost of production)
*Import prices (cost of raw materials)
*Productivity ( influenced by investment and
technology)
Are all held constant
*
Shift to the
left
Wages
Imported raw
materials
Productivity
Shift to the
right:
Wages
Imported
raw
materials
Productivity
*
Occurs where AD=AS and
the price level PLe.
Equilibrium AD/AS
This level also indicates
the level of employment
(Ye)
Equilibrium represents
where the economy will
tend to move towards.
Once we are at this
equilibrium the economy will
stay here unless AD or AS
moves
PLe
Ye
*
Equilibrium AD/AS
Full
employment
(economic
potential)
PLe
Ye
Yf
Changes to Equilibrium
A change in either aggregate demand or aggregate supply results in a change in
the equilibrium price level and a change in the level of national income, output
and employment.
An increase in AS
AS’’
Price
Level
AS’
PL ‘’
PL
•A decrease in the price level
•An increase in real income, output
and employment
A decrease in AS
PL’
An increase in the price level
Ye’’ Ye
Ye’
Y
A decrease in real income,
output and employment levels
Changes in AD and AS






What will happen if there is an increase in
AD?
Increase in price level
Increase in real income, output and employment
What will happen if there is a decrease in AD?
A decrease in price level
A decrease in real income, output and
employment.