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The Affect of the Aggregate Demand

In: Business and Management

Submitted By sephiria5393
Words 844
Pages 4
The aggregate demand – aggregate supply model is used by economists to analyze the behavior of the macroeconomy in both the short run and the long run and aggregate demand in general refers to total spending by households, businesses, governments, and foreigners on domestically produced final goods and services. The aggregate demand curve (AD) describes the behavior of buyers of final goods and services in the aggregate. The aggregate demand – aggregate supply model allows us to see what factors influence prices and real output in the short-run, or as the economy proceeds through the business cycle. And now we will see how the aggregate demand effects economy in the short run by analyze the changes in aggregate demand can “move” the economy through the business cycle.
As we can see in the diagream below, a decrease in aggregate demand moves the economy into recession with a rise in cyclical unemployment INFL MRAS SRAS E1 INFL1

AD

yn y

An increase in aggregate demand also causes a recovery that returns production to natural levels and reduces cyclical unemployment which is illustrated in the below diagram.
INFL
MRAS SRAS INFL1 E1

AD y1 yn y
Furthermore, an increase in aggregate demand, especially when the economy is at the natural level of output, increases the inflation rate with very little change in real output which also is illustrated by the diagram. INFL MRAS SRAS E1 INFL1

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