Macroeconomics Graphs

What is an Aggregate Demand Curve?

Shows the total amount of goods and services demanded (total aggregate demand) across an entire economy at different price levels.

What is aggregate demand?

The total demand for all finished goods and services produced in an economy.

What does each movement along the aggregate demand curve mean?

• A → B: Higher prices → contraction of aggregate demand.

• A → C: Lower prices → expansion of aggregate demand.

Causes of movement along the aggregate demand curve?

• Changes in prices.

• Changes in population.

• Changes in average income.

What does each shift of the aggregate demand curve mean (constant price)?

• AD1 → AD2: Outward shift - will raise national output/aggregate demand at all price levels.

• AD1 → AD3: Inward shift - will reduce national output/aggregate demand at all price levels.

Causes of shifts of the aggregate demand curve?

• Changes in real incomes/employment.

• Changes in government spending, taxation and borrowing.

• Changes in monetary policy interest rates and supply of credit.

• Changes in external value of a country’s exchange rate.

What is aggregate supply?

Quantity of goods and services that producers in an economy are willing and able to supply at a given level of prices.

What is short run aggregate supply (SRAS)?

The relationship between planned national output and the general price level.

What does each movement along the short run aggregate supply curve mean?

• A → B: Higher prices → expansion of aggregate supply → more profitable.

• A → C: Lower prices → contraction of aggregate supply → less profitable.

What does each shift of the short run aggregate supply curve mean? (constant price)

• A → B: Inward shift of the short run aggregate supply curve → decrease in aggregate supply.

• A → C: Outward shift of the short run aggregate supply curve → increase in aggregate supply.

Factors that lead to an increase in aggregate supply:

• Cheaper raw materials.

• Increased labour productivity.

• Decrease in taxes.

Factors that lead to a decrease in aggregate supply:

• More expensive raw materials.

• Decreased labour productivity.

• Natural disasters.

• Higher energy prices.