What happens to aggregate demand in the short-run?

If aggregate demand increases to AD 2, in the short run, both real GDP and the price level rise. If aggregate demand decreases to AD 3, in the short run, both real GDP and the price level fall.

How is economic growth illustrated on the ad as model?

In an AD/AS diagram, long-run economic growth due to productivity increases over time is represented by a gradual rightward shift of aggregate supply. The vertical line representing potential GDP—the full-employment level of gross domestic product—gradually shifts to the right over time as well.

What is the real output of the aggregate demand model?

Aggregate demand eventually equals gross domestic product (GDP) because the two metrics are calculated in the same way. As a result, aggregate demand and GDP increase or decrease together.

What happens to aggregate demand in a recession?

During a recession, people will buy less of practically all goods and services at the same price levels. Therefore, demand curves for most products will shift to the left during a recession.

What factors can increase or decrease aggregate demand?

Aggregate demand can be impacted by a few key economic factors. Rising or falling interest rates will affect decisions made by consumers and businesses. Rising household wealth increases aggregate demand while a decline usually leads to lower aggregate demand.

How are aggregate demand and output related in the short run?

In the short run, output fluctuates with shifts in either aggregate supply or aggregate demand; in the long run, only aggregate supply affects output. In the short run, output is determined by both the aggregate supply and aggregate demand within an economy.

How are aggregate demand and aggregate supply related to economic growth?

In most macroeconomic models, aggregate demand and aggregate supply interact to determine the short-run performance of the economy, but when it comes to the long-run analysis of economic growth, aggregate demand usually makes its exit and aggregate supply rules the roost.

What happens if aggregate demand decreases to AD3?

If aggregate demand decreases to AD3, in the short run, both real GDP and the price level fall. A line drawn through points A, B, and C traces out the short-run aggregate supply curve SRAS. The model of aggregate demand and long-run aggregate supply predicts that the economy will eventually move toward its potential output.

Where does equilibrium occur in the aggregate supply curve?

Figure 22.6 Long-Run Equilibrium Long-run equilibrium occurs at the intersection of the aggregate demand curve and the long-run aggregate supply curve.