By; Rodney Hunter
Understand the aggregate demand curve is by far one of the most useful tactics known to earth as far as economics. In our study of GDP accounting, we divided GDP into four components: consumption spending, Investment spending, government purchases and net exports. These four components are also the four parts of aggregate demand because the aggregate demand curve really just describes the demand for total GDP at different price levels. As we will see, changes in demand coming from any of these components will shift the aggregate demand curve at any given moment. To convene an understanding on why the aggregate demand curve is downward sloping then we need to consider the effects of a change in the overall price level in the economy. First, let's look at the supply of money in the economy. As price level or average level of prices in the economy changes,so does the purchasing power of your money. Therefore indicating when that the quality of aggregate demand increases as the price level in the economy falls, this is an example of the real-nominal principle.
Let's talk about how the shift in the aggregate demand curve and how the multiplier makes the initial shift bigger. Well, its con-tempted by an increase in desired spending shifts aggregate demand by more than the increase. Therefore the ratio of the total shift in aggregate demand to the initial shift in aggregate. Also their are factors that also can shift the aggregate demand as well, that being said factors that increase the demand are decrease in taxes, an increase in government spending, and increase in the money supply. Basically an increase in desired spending will shift the aggregate demand curve horizontally to the right. A few things to look at while discussing the multiplier are consumption function, autonomous consumption spending (C), Marginal propensity to consume (MPC), and the Marginal propensity to save.
Understanding the aggregate supply curve and how a person uses aggregate demand and aggregate supply to determine output and prices is very economical. The aggregate supply curve (AS) shows the relationship between the level of prices and the total quantity of final goods and output that firms are willing and able to supply. The aggregate supply curve will complete our macroeconomics picture. To determine both the price level and real GDP, we need to combine both aggregate demand and aggregate supply. One slight complication is that because prices are “sticky” in the short-run, we need to develop two different aggregate supply curves, one corresponding to the long run and one to the short-run. Together, the curves will enable us to understand how changes in aggregate demand affect prices in the long-run.The intersection of an aggregate demand curve and an aggregate supply curve determines the price level and the equilibrium level of output. At that intersection point, the total amount of output demanded will just equal the total amount supplied by producers. Then, the economy will be in macroeconomic equilibrium. The exact position of the aggregate demand will depend on the level of taxes, government spending, and the supply of money, although it will always be a downward slope. The level of full-employment output determines the long-run aggregate supply curve. An increase in aggregate demand will shift the aggregate demand curve to the right. In the long run, the increase in aggregate demand will raise prices but leave the level of output unchanged. In general, shifts in the aggregate demand curve in the long run does not change the level of output in the economy, but only change the level of prices. In the long-run output is determined solely by the supply of human capital and physical capital and the supply of labor, not the price level. Also the short-run aggregate supply curve is a relatively flat horizontal supply curve that represents the idea that prices do not change very much in the short run and that firms adjust production to meet demand. As far as changes with the Aggregate Demand, they mainly result in output in the short run.
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