1.4 The interaction of aggregate demand and supply

Macroeconomic equilibrium

When the quantity of goods and services supplied in an economy equals the quantity of goods and services demanded in it (AS = AD)

Equilibrium price

The price level where AS = AD

Impact of an increase in AD

This leads of an expansion of AS, and a higher equilibrium GDP but also a higher price level

Impact of a fall in AD

This leads to a contraction of AS, and a lower equilibrium GDP but also a lower price level

Impact of an increase in AS

This leads to an expansion of AD, and a higher equilibrium GDP, and a lower price level

Impact of a fall in AS

This leads to a contraction of AD, and a lower equilibrium GDP, and a higher price level

Causes of a fall in AS

Brain drain, decline in investment, higher production costs, effects of a natural disaster, effects of a political conflict