Question

Providing an example of each, explain fully the differences between an increase in:

Aggregated demand

Short-run aggregate supply

Long-run aggregate supply

Answer 1

An increase in aggregate demand is the increase in demand for each level of price. It can happen due to many reasons (price change not being one). For instance, if a country discovers an old and exploits it to increase the income of all the citizens of the county, the purchasing power of people will increase and they will demand more and the AD curve shifts to the right.

An increase in the short term aggregate supply curve can happen due to reasons that do not affect the potential output (long run supply) but are majorly cyclical. For instance, if a years sees very good rainfall and the agriculture sector booms, the aggregate supply can increase in the short run, but the potential long-run output is not affected.

An increase in the long run aggregate supply is a change in the potential output of the economy. For instance in the previous example, if the country invests in education and technology, and as a result the country is able to develop a technology to have a good harvest even without the necessary rainfall, the long run potential output increase and the long run AS will shift to the rigth.