These problems usually occur when supply or demand are too high or too low. In order to combat this problem aggregate demand must be adjusted to to reach an equilibrium. [The equilibrium means the quantity supplied is the same as quantity demanded]
AD the Straight line pointing down is aggregate Demand, the long curved line pointing upwards is aggregate supply. Which is also the Maximum an economy is able to produce with it's current supplies.
The Price Level is the amount of inflation in an economy.
Aggregate Demand shows the Output of an economy which is Real GDP (Gross domestic production)
The above diagram is just the basic measurement of aggregate supply and aggregate demand.
Once I have mastered the drawing of this diagram I will move on to show the change in the economy using this diagram.
The economy is operating with a lot of resources.
This diagram shows the Increase in aggregate demand.
The line labeled AD is where the Aggregate demand was before, however AD1 shows the increase in demand which adds a small increase to inflation. This Shows the Price level rises because the demand has gone up. (fig P1) this is also known as Demand Pull Inflation. Though there is a small rise in inflation there is also a rise in Real GDP - Real Gross Domestic Production also known as Output. Which shows Economic Growth.
Firms operating at full use of
Resources.
Why?
Because firms are operating at full use of there resources the price has gone up (Cost Push Inflation)
This means that firms must Import rather than Export which costs more money (X-M)
Which means there is a higher demand when operating at full employment.
Price Rises - Demand Rises - X-M (Exports minus Imports) Rise in Inflation = Less Economic Growth
Which means the economy suffers heavy inflation with a little economic growth.
1 blog in 3 mths?
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