Changes In Aggregate Demand And Short-Run Aggregate Supply

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1. Explain how the following changes in aggregate demand or short-run aggregate supply, other things held unchanged, are likely to affect the level of total output and the price level in the short run.

The level of total output and the price level are determined in the short run by the intersection of the short-run aggregate supply curve and the aggregate demand curve (Rittenberg and Tregarthen, 2012). Therefore, if you know how the changes in aggregate demand or short-run aggregate supply will shift their respective curves, you can explain how the changes will affect the level of total output and the price level.

An increase in aggregate demand

An increase in aggregate demand will shift the aggregate demand curve to the right. This will cause the aggregate demand curve to intersect the short-run aggregate supply curve at a point above and to the right of the previous equilibrium point. This means that total output and price levels will rise. In the graph below, the shift in the aggregate demand curve to the right was caused by an increase in government purchases, this led to a new intersection or equilibrium point from P1 to P2. The new intersecting point is at a higher price level and higher output level.

Source: (Rittenberg and Tregarthen, 2012)

A decrease in aggregate demand

A decrease in aggregate demand would have the opposite effect to the increase in aggregate demand that was discussed in the above answer. With a decrease in aggregate demand, the

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