Question

Use the aggregate demand and supply to show the effects of an increase in consumer spending in the short-run and in the long-run. Explain the reason for each shift

Answer 1

Aggregate demand and supply

In economics, the law of supply and demand is a common term and one of the fundamentals of economic theory. Supply and demand express a direct relationship between what producers supply and what consumers demand in an economy and how that relationship affects the price of a specific product or service. Aggregate supply and aggregate demand are the total supply and total demand in an economy at a particular period of time and a particular price threshold. Aggregate supply is an economy's gross domestic product (GDP), the total amount a nation produces and sells. Aggregate demand is the total amount spent on domestic goods and services in an economy. Aggregate supply and aggregate demand convey how much firms are willing to produce and how much consumers are willing to demand at a specific price point.

Supply and Demand Curves Fluctuations

Increased supply generally occurs in response to a demand increase and results in lower prices over time. The amount of time required for businesses to respond to an increase in demand by increasing production varies significantly, depending on the product and industry. If materials are difficult to obtain, the length of time required to bring additional products to market may increase in an economic model that is less responsive to demand changes. Price increases may result in reduced demand and cause too much supply.

Reason for each shift

• The aggregate demand curve, or AD curve, shifts to the right as the components of aggregate demand—consumption spending, investment spending, government spending, and spending on exports minus imports—rise. The AD curve will shift back to the left as these components fall.

• AD components can change because of different personal choices—like those resulting from consumer or business confidence—or from policy choices like changes in government spending and taxes.

• If the AD curve shifts to the right, then the equilibrium quantity of output and the price level will rise. If the AD curve shifts to the left, then the equilibrium quantity of output and the price level will fall.

• Whether equilibrium output changes relatively more than the price level or whether the price level changes relatively more than output is determined by where the AD curve intersects with the aggregate supply curve, or AS curve.