The aggregate demand is the sum of consumption, investment, government expenses, and net exports. Aggregate supply is the total output an economy produces at a given price level. Firms achieve equilibrium when they produce the quantity of goods and services consumers want to buy – that is, when aggregate supply equals aggregate demand. Here we will examine shifts in aggregate supply and aggregate demand and their short-term and long-term effects for the whole economy.
Upon successful completion, you will be able to:
- explain the factors leading to a shift in the consumption function;
- define short-run equilibrium and long-run equilibrium, and discuss how they differ;
- graphically represent and interpret a long-run aggregate supply curve, and explain its connection to natural level of unemployment; and
- describe how short-run equilibriums occur above and below the output level associated with the natural rate of unemployment.