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The AD–AS model explains how the overall level of output (real GDP) and the general price level are determined in an economy. Aggregate demand (AD) represents total planned spending on final goods and services, while aggregate supply (AS) represents total production/supply at different price levels. Their intersection shows macroeconomic equilibrium. Changes in consumption, investment, government spending, taxes, money supply, technology and costs can shift AD or AS, changing equilibrium output and price level.
Aggregate demand is the total demand for final goods and services in an economy at different price levels.
Main components:
So,
Aggregate supply is the total supply (total output) of final goods and services produced in an economy at different price levels during a given period.
The AD curve generally slopes downward because when the price level falls, purchasing power rises, interest rates may fall, and exports may become more competitive—leading to higher total demand.
In the short run, AS often slopes upward: higher prices can encourage firms to produce more, given wages and some costs are sticky. In the long run, AS may be vertical at potential output (as per syllabus level, focus on basic idea).
Macroeconomic equilibrium occurs where planned spending equals planned output:
At equilibrium:
AD increases (shifts right) due to:
AD decreases (shifts left) due to the opposite factors.
AS increases (shifts right) due to:
AS decreases (shifts left) due to:
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The AD–AS model explains how the overall level of output (real GDP) and the general price level are determined in an economy. Aggregate demand (AD) represents total planned spending on final goods and services, while aggregate supply (AS) represents total production/supply at different price levels. Their intersection shows macroeconomic equilibrium. Changes in consumption, investment, government spending, taxes, money supply, technology and costs can shift AD or AS, changing equilibrium output and price level.
Aggregate demand is the total demand for final goods and services in an economy at different price levels.
Main components:
So,
Aggregate supply is the total supply (total output) of final goods and services produced in an economy at different price levels during a given period.
The AD curve generally slopes downward because when the price level falls, purchasing power rises, interest rates may fall, and exports may become more competitive—leading to higher total demand.
In the short run, AS often slopes upward: higher prices can encourage firms to produce more, given wages and some costs are sticky. In the long run, AS may be vertical at potential output (as per syllabus level, focus on basic idea).
Macroeconomic equilibrium occurs where planned spending equals planned output:
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From this topic
Factors that shift AD include:
(Any three factors can be written.)
Factors that shift AS include:
(Any three factors can be written.)
Aggregate demand (AD) is the total planned spending on final goods and services in an economy at different price levels. It is made up of consumption, investment, government spending and net exports. In symbols: AD = C + I + G + (X − M).
Aggregate supply (AS) is the total output of goods and services that firms are willing to produce at different price levels. In the short run, AS is often upward sloping because higher prices can encourage higher production when some costs are fixed.
Macroeconomic equilibrium occurs at the intersection of AD and AS. At this point, planned spending equals planned output, so firms have no reason to change production and the general price level tends to be stable.
Thus, the AD–AS model helps explain how the economy’s output and price level are determined together.