Aggregate Demand:

All the spending of all the people in the economy

Real GDP buyers are willing and able to purchase at different price levels

Price level vs Real GDP

Downward sloping for 3 reasons:

1. The Wealth effect

a. People buy less because they have less wealth
2. Interest rate effect
a. Banks have to increase the interest rate, people take out less
3. Foreign Trade effect
a. When price level goes up, less gets exported

AD = GDP = C + I + G + Xn

Aggregate Supply:

Amount of goods and services that firms will produce in an economy at different price levels

Supply for everything by all firms

Short-run aggregate supply:

Wages and resource prices will not increase as price levels increase

Long-run aggregate supply:

Wages and resource prices will increase as price levels increase

Upwards sloping in short run

Vertical in long run |

Shifters:

1. Change in resource prices

a. Supply shocks
b. Inflationary expectations (I need a raise)
2. Change in actions of the government
a. Taxes, subsidies, regulations
3. Change in productivity/technology