Aggregate demand and supply model- basic Macro-Economatric tool

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 downward sloping .

Determination of output and price level 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
.

Upward and leftward movement in the supply curve .

The Classical supply curve

It is a vertical line .

Keynesian supply curve

Horizontal line

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 .

Vertical or horizontal is the matter of time But intermediate slopped in the midterm even in the short run it is curved and not a straight horizontal line .

AD Curve

Expansionary policy or contractionary policies can shift the demand curve .

Aggregate demand policies under alternative supply assumptions

The classical case The Keynesian case

Supply- side economics

Putting AS and AD together

The price level will depend on the relative shifts of both of the curve .