Aggregate demand and aggregate supply - Essay Example

Boyes, Melvin & Boyes (2008) stated that the value of real GDP is determined at the point where aggregate demand and aggregate supply curves intersect each others. From the above example of aggregate demand and supply curves of Evergreen Land, both aggregate demand and aggregate supply curves intersect at the price level of 100, and this equilibrium point determines the value of real GDP. Since equilibrium is the point where the value of real GDP is determined, a shift in either the aggregate demand or aggregate supply curves leads to a change in the real GDP values.

Answer: Aggregate supply curve shows the level of real domestic outputs that firms produce at various price levels. Aggregate supply curve is short run is upward sloping, but is downward sloping in the long run. Long run aggregate curve, as depicted above, will be a vertical line at the full employment output because the wages and other input prices in the long-run increase and decrease to match changes in the price levels. Answer: A decrease in the price level is very likely to cause an increase in aggregate demands in the short run.

According to Keynesian multiplier effect, this should in turn impact the aggregate demand to cause a further increase. An increase in the aggregate demand for goods or services due to various factors such as government policy or wealth factors or international factors can as a result shift the aggregate demand curve horizontally to the right (Kennedy, 2000). When there is an increase in the aggregate demand, it causes the price level and real GDP to move in the same direction because of increased spending or higher investments of governments.

It also means that more and more quantities of national output will be demanded at any given price levels. The increase in aggregate demand thus shifts the aggregate demand curve to the right side. The short-run equilibrium level of real output and the price levels are determined by the point where both