Concept Introduction:
Aggregate Demand Curve ( AD ): It shows how
Fiscal Policy: It includes government expenditure and taxes. When government expenditure is increased or taxes are decreased then Ad curve shifts rightward and vice versa.
Short Run Aggregate Supply ( SRAS ): It is a positively slopped curve in which supply increases when price rises. The reason for upward slopping is that the wages are sticky in short run due to formal or informal contracts. At higher aggregate prices there is higher profit leading to high level of output.
Long Run Aggregate Supply ( LRAS ): It is a vertical curve which means it is independent of price. When price increases there is no change in quantity supplied. In the long run nominal wages are not fixed rather it can be negotiated.
Supply Shock: In every economy it is a type of sudden event that leads to change in the supply of output for short period of time. Supply may decrease or increase depending upon the type of shock.
Positive Supply Shock: It is a type of shock in which aggregate supply in an economy expands. It causes price to increase. It is a rare phenomenon.
Negative Supply Shock: It is a type of shock in which aggregate supply in an economy degrades.
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