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Aggregate Demand/Supply Model & Its Effect on Price Level and Output or Real GDP July 6, 2009

Posted by petrarcanomics in Markets: Supply & Demand, Role of Government.

The aggregate demand aggregate supply model has price level on its vertical axis and output or real GDP on its horizontal axis.

Aggregate Demand

Aggregate demand is made up of consumption, investment, government spending, and net exports. It is negative sloping due to the interest rate effect, the real balances effect, and the foreign purchases effect. Aggregate demand shows the relationship between the average price level for all goods and services and the quantity of all goods and service people are willing to buy.

Short-run Aggregate Supply

Short-run aggregate supply is the total amount of goods and services that businesses are willing to produce over a range of price levels.

Long-run Aggregate Supply

Long-run aggregate supply is the amount of goods and services that can be produced when the economy is using all of its resources.

Price Level

Price level is an overall measure of prices on goods and services throughout the economy.


Output or real GDP is the quantity of overall goods and services that are being produced in the economy.

True Growth

True growth in the economy is depicted as a rightward shift in the long-run aggregate supply curve. Another way true growth can be depicted is an outward shift of the production possibilities curve (PPC). True growth in our economy can be achieved by increased productivity, newer or improved technologies, increases in resources, or increased education and training of workers or labor.



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