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This analysis helps us studying output fluctuation and determination piece level and the inflation rate .
Aggregate supply
AS curve describes , for each given price level , the quantity of output firms are willing to supply .Generally AS curve is upward sloping .
Aggregate demand
AD Curve shows the combinations of the price level and the level of out put at which the goods and money markets are in simultaneously in equilibrium . The AD curve is generally downward sloping
The interaction of aggregate demand and supply determines the equilibrium output level of and equilibrium level of price .
How does the money supply increase the price ? Or output or both
Generally it will shifts the AD Curve and thus output and price both .
We call the level of output corresponding to full employment of the labor force potential GDP. It grows overt time as the economy accumulates resources and the technology improves . Thus the AS curve moves to the right over time and the changes in the potential GDP do not depend on price level . Thus we can say potential GDP is exogenous to price level .
AD Curve
Expansionary policy or contractionary policies can shift the demand curve .