Aggregate Demand And Aggregate Supply Model - 806 Words

Aggregate demand and aggregate supply model is considering about the economy as a whole and used to explain how national income is determined. (economicsonline, 2016) Aggregate demand is the total demand for the economy scarce resources at a given price level and in a given period of time. It includes export(I), government spending(G), investment(X), some of consumer spending and less imports from aboard(M). The formula is AD= C+I+G+X-M. (economicsonline, 2016) Apart from imports, AD is related with price, so, C, I G and X are have different elasticity with the general level of prices. As shown below, in the short run, if price level decrease, GDP will expand, if price level increase, GDP will contract. The reasons lead to aggregate demand†¦show more content†¦The first one is prices and wages do not respond quickly to change in demand or supply. Another one is firms are often slow to adjust wages. If price level rise, it causes firms are more profitable with same wage, so f irms can hire more employees which lead to the increase of output. The third one is changing firms’ based prices to account for an unexpected increase in the price level can be costly. (Parker, 2014) Because the economy as a whole, AD and AS interact can influence level of price and level of output in the country. Change in AD will lead to change in real GDP, change in real GDP will lead to change in AS, change in AS will change price level. As shown in figure 2, when aggregate demand equal to aggregate supply, the output level Y and price level P will achieve an equilibrium. Change in AS and AD will lead to important effects on unemployment, inflation and price. In short rum, if price level below P, there are more demand than supply, firms will increase production and rise prices to earn more profit, so the excess demand will cause price level back up to the equilibrium level. If price level was above P, some goods and services will surplus, in order to sell more to earn a profit, firms will reduce their prices, or, firms will produce less to decrease loss. Finally, price level will come back to P, macroeconomic equilibrium achieved. (Colin and Susan, 2015) Figure 2 Macroeconomic equilibrium (source: Colin and Susan,Show MoreRelatedAnalysis Of The Aggregate Demand And The Aggregate Supply Model Essay946 Words   |  4 PagesThe aggregate demand and the aggregate supply model is a macroeconomics model that explains price level and real output through the relationship of aggregate demand and supply. The aggregate demand curve consist of consumption(C), investment (I), government spending (G), net export (NX). The question caused by monetary expansion. 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