Question

Outline the final equation of the aggregate demand and aggregate supply curve and identify the variables and how each variable affects the model.

Answer 1

Aggregate Demand is the measurement of total demand for all finished goods and services produced in an economy.Which is expressed as the total amount of money exchanged for the final goods and services for a particular level of price for a particular period of time. The downword sloping demand curve shows thethe relatioship between price level of given output and total quantity demanded.Aggregate demand consist of the components of demand:consumption,Government investment,spending and net exports means exports minus imports.

The equation is,

Aggregate Demand = Consumption(C)+Investment(I)+Government Spending(G)+Export(X)-Import(M)

Aggregate Supply

Aggregate supply means total output produced with in an economy for a given price and in a given period of time. Aggregatesupply curve shows the positive relationship between price level and output supplied.

Aggregate supply equation(AS) = Consumption(C) + Savings(S), i.e., Income(Y) = Consumption(C) + Savings(S).

Each components will affect the Aggregate demand and Aggregate supply.consumption spending will fall as the price level rises.Higher interest rates will reducing both consumption and investment spending.Higher domestic price level, relative to price levels in other countries, will reduce net export expenditures and vice versa. Aggregate demand increase then aggregate supply reduce both have opposit relationship.when AD and AS tangent that point called eguilibrium.