Unit 11 – Aggregate Demand and Aggregate Supply

This unit discussed aggregate supply and aggregate demand and general economic fluctuations.

The book outlines explains that economic fluctuations are irregular and unpredictable, that many economic variables fluctuate together and as output falls, unemployment rises. Now the book explains many different reasons why the markets fluctuate, however I believe the one reason they left out is humans are rationally bounded and therefore are not always predictable because they may or may not make decisions that better them.

Aggregate demand curve is when the quantity of all goods and services demanded in the economy at any given price. A change in price will cause a change in quantity of output within an economy. The aggregate demand curve is downwards sloping because of three reasons:

· Because a decrease in price level makes consumers feel more wealthy, so they will spend more increasing the amount of goods and services demanded.

· As the price level decreases it encourages people to invest more into investment goods and therefore increasing the amount of good and services demand.

· When the currency of a country decreases in relative terms against other countries ( real exchange rate), the currency exports more goods and services overseas because the goods and services are more attractive to people from other countries. This will increase net exports, therefore increasing net exports. However, the book mentioned that net exports would be stimulated (increasing goods and services demand), however did not explain if the curve has an affect on imports (i.e. total decrease value of imports could be greater than the total of increase value of exports, when the exchange rate depreciates). The imports do not have an effect on the curve because the aggregate demand is for all goods and services demanded within an economy? Or does imports have an effect on the aggregated demand curve? I would be guessing at this stage imports does have an effect on the aggregated demand curve. I will do more research and fill you in another blog.

The aggregate demand curve will shift pretty much for any other reason than a change in price level (i.e. law changes, new instruction of products, changes in money supply).

The book argues that the long run aggregate supply curve is vertical due to in the long run an economy’s supply of goods and services depends on the supply of capital and labour plus the availability of technology.

The short-term curve is up-sloping, illustrating that as price increases the quantity of output will increase also. The book does not explain this very well, however I would imagine that the reason why it is upwards slopping is because as the price level increases, companies will want to produce therefore hiring more workers creating less unemployment, therefore possibly making a labour shortage and therefore competition for labour increase and i.e. increasing employees wages which would increase the price level of products.

The supply curves will move with changes in natural resources, physical and human capital and also technology. Also peoples price expectations will also move the curve. I.e. anything other than price level.

The two causes of a recession is a left shift in the aggregate demand curve and also a upwards shift in the aggregate supply curve. If the aggregate demand curve moves to the left, there is less output being demanded for a same price level, the short run aggregate supply curve will have to move to the left to allow the all three curves to find equilibrium, and i.e. creating a situation at the natural rate of output (i.e. the LRAS) the aggregate goods and services have decreased within the market.