Question

In this discussion board contribution, your task to think more carefully and applied concerning the Aggregate Demand and Aggregate Supply framework. Suppose that for some reason, there is a fall in Aggregate Demand from a position that a reflected long-run full employment output (the “natural rate of unemployment”).

If this decrease in Aggregate Demand had been anticipated by all market participants, would there be any negative affects on the levels of aggregate output and employment, and why? How would the required adjustments have come about? But suppose that there is an unanticipated increase in Aggregate Demand, what will be the short-run and long run effects – why and through what changes?

In both the anticipated and unanticipated situations, what would happen to the general price level in these processes?

Answer 1

at the intersection of AD as well as SHORT RUN producer[ AS] of all output that intersection determines the short run equilibrium output and price level.

and then it is compared with full employment output and if the short run matches with the full empoyment that is long equilibrium and it falls short then recession and if it is higher then there is situation of boom.

in the first situation , if there is fall in the aggregate demand then theree will be decrease in the equiibrium output as well as decrease in general price which is adverse for economy and if this is anticipated by forces of market then there will be chnage in natural rate of unemployment , even increase in employment and also increase in output.

in the second situation , if the change is not anticipated then curve will not incorporate .

even when the AD falls supply will exceeds demand puts downward presure on the price level intilll the economy asssumes a new equilibrium at lower price level and lower output because with the chnage output reduces and unemployment rate increases.

further in anticipated forces there can be adjustments made as per the reuiremen wich will be make with increase in supply and thus making the price level higher and also increasing the output level back to previous one

but if unanticipated or not done adjustment but controlled naturally then it willl take time and can be corrected by bringing suppply curve low keeping the price level low and output level low thus making equilibrium at lower level.