Lecture 14 - Aggregate Demand and Supply (19/11/25)

What does Aggregate Demand (AD) represent?

Total demand for all goods and services produced in an economy at a given overall price level and period.

What are the components of Aggregate Demand (AD)?

Consumption (C), Investment (I), Government Spending (G), and Net Exports (Nx).

What is the aggregate demand equation?

AD = C + I + G + Nx.

What is the shape and significance of the Aggregate Demand curve?

It slopes downward, indicating an inverse relationship between the price level and the quantity of goods and services demanded.

What effect describes the relationship between a lower price level and consumer spending?

The Wealth Effect.

What happens to interest rates when the price level decreases?

Interest rates decrease, stimulating investment spending.

What is Short-Run Aggregate Supply (SRAS)?

The total quantity of goods and services that firms are willing to produce and sell at different price levels in the short run.

Why is the SRAS curve upward sloping?

Some input prices are sticky, meaning they do not rise or fall quickly with changing economic conditions.

What is Long-Run Aggregate Supply (LRAS)?

The relationship between the aggregate price level and the quantity of aggregate output supplied in the long run, where all prices are fully flexible.

How is the LRAS curve characterized?

It is vertical at the economy's potential output or natural rate of output.

What shifts the LRAS curve?

Changes in labor, capital, natural resources, or technology.

What causes demand-pull inflation?

An increase in demand for a product in the economy, leading to a rise in price levels.

What causes cost-push inflation?

Increases in the cost of production that lead to a decrease in supply, consequently raising price levels.