Aggregate demand and supply

Aggregate demand

the sum of all market demands for all goods and services

The AD curve relates ____

changes in the price level to changes in aggregate expenditures

3 initial effects of the AD curve

wealth effect, international rate effect, multiplier effect

Short-run aggregate supply curve

aggregate supply changes in the short-run in reaction to a change in the price level

long-run aggregate supply curve

the long-run relationship between aggregate supply and the price level

what does the LAS curve show

the long-run relationship between output and the price level

what does the position of the LAS curve depend on

potential output- which is the amount of goods and services an economy can produce when both capital and labor are fully employed

Why is the LAS vertical

because potential output is unaffected by the price level

shifts of the LAS curve

increases in entrepreneurship, physical capital, technology, and human capital

four shifts in the SAS curve up

increase in input prices, negative expectations, increases in sales and excise taxes, decrease in productivity

4 shifts to the right in the SAS curve

decrease in input prices, positive expectations, decrease in sales, increase in productivity

where is potential output assumed to be

in the middle of a range bounded by high and low levels of potential output

The relationship between potential and actual output also causes the SAS curve to shift:

when resource are over-utilized and under-utilized