aggregate demand & aggregate supply

What affects aggregate demand

Relations between price level and aggregate output demanded

C+I+G+X-M

Why ad downward sloping

(Wealth effect) when price level increase ,purchasing power of money decrease, (C)consumption expenditure decrease gdp decrease ,ad decrease

(Interest rate effect) when price level increase ,money demand and nominal interest rate increase.private consumption expenditure and gross investment expenditure decrease ad decrease (people buy less save less less money lend out to borrowers)

Net export effect (price of goods overseas decrease import more )

When price level increase ,quantity demanded decrease,export decrease and import increase gdp decrease and ad decrease

Aggregate supply(supply of all good)(relation between price level and aggregate output supplied

Decrease in prices-SR

Wage adjust-LR

Production of good and services shift curve

Imperfect adjustment of input

Input price are less flexible ,when price level increase ,input price increase in slower rate than output prices ,profitable for firms to produce more

Aggregate supply increase

Change in ad

Change in aggregate supply and lras

Inflationary gap and deflationary gap

Ye larger than yf ,excess demand for factor of production sras decrease

Input price increase

Ye is lower than yf

Excess supply of factor of product input prices decrease

Sras increase

Change in ad in short run and long run

In short run

Ad increase ,price llevel increase aggregate output increase to ye

in long run

Ad increase,ye larger than yf ,inflationary gap

Excess demand for factors of production input prices decrease increase ,sras decease until long run equilibrium ,price level increase further ,full employment level is restored

Change in sras in short and long run

In short run ,sras decrease,price level increase ,aggregate output decrease,

in long run ,ys smaller than yf Excess,deflation gap ,excess supply for factors of production ,input price decrease,sras increase until long run equilibrium achieved price and quantity go back ,

Change in lras in short and long run

In short run,lras increase,short run price level unchanged ,aggregate output unchanged

In long run,as lras increase,yf increase to yf 1,deflation gap,have excess supply for factor of production input price decrease,sras increase until long run equilibrium achieved ,price level decreased ,a

Summary