Aggregate demand and supply (Essay Sample)

Aggregate Demand and Aggregate Supply Student’s Name Course Code: Course Name Name of your Institution Instructor’s Name Date of Submission Aggregate Demand and Aggregate Supply One reason contributing to the downward slope of the aggregate demand curve is the wealth effect. When prices fall, the real worth attached to money increases. Individuals can leverage this improved monetary strength to obtain more goods and services ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"XmjzU8yH","properties":{"formattedCitation":"(Zhou, 2022)","plainCitation":"(Zhou, 2022)","noteIndex":0},"citationItems":[{"id":3656,"uris":["http://zotero.org/users/local/MgqJMbgS/items/M57V824N"],"itemData":{"id":3656,"type":"article-journal","container-title":"Redistribution, and the Aggregate Impact of External Shocks (February 6, 2022)","source":"Google Scholar","title":"Open economy, redistribution, and the aggregate impact of external shocks","URL":"https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3902121","author":[{"family":"Zhou","given":"Haonan"}],"accessed":{"date-parts":[["2024",3,13]]},"issued":{"date-parts":[["2022"]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (Zhou, 2022). Such growth in purchasing power eventually leads to higher consumption levels, fueling aggregate demand. Another reason is the interest rate effect. When prices fall, interest rates also decrease. The rationale is that declining prices signal subdued inflation levels, allowing central banks to allay fears of triggering higher inflation by reducing these interest rates. The exchange effect also contributes to the downward slope of the aggregate demand curve. When a country’s price level decreases, its currency exchange rate also appreciates ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"7TCnprdR","properties":{"formattedCitation":"(Deleidi & Mazzucato, 2019)","plainCitation":"(Deleidi & Mazzucato, 2019)","noteIndex":0},"citationItems":[{"id":"0rVWvKx0/qoDW9jG5","uris":["http://zotero.org/users/local/MgqJMbgS/items/A84YN9BX"],"itemData":{"id":1137,"type":"article-journal","container-title":"Review of Political Economy","issue":"3","note":"publisher: Taylor & Francis","page":"315–335","source":"Google Scholar","title":"Putting Austerity to Bed: Technical Progress, Aggregate Demand and the Supermultiplier","title-short":"Putting Austerity to Bed","volume":"31","author":[{"family":"Deleidi","given":"Matteo"},{"family":"Mazzucato","given":"Mariana"}],"issued":{"date-parts":[["2019"]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (Deleidi & Mazzucato, 2019). The reason lies in low pricing, which makes the country's exports more financially accessible to international markets. Such improved availability increases net exports and directly influences aggregate demand's final component. When aggregate demand components, like consumption, investment, government spending, and net exports, change, they cause a shift on the AD curve. At the same time, a shift on the AS curve occurs when factors influencing productivity, such as technology advancement and input prices, change, resulting in a change in Aggregate Supply (AS). When AD rises, output, employment, and inflation also increase. Businesses ramp up their endeavors when there is an increase in AD, ensuring they keep pace with consumers’ demands for additional goods or services offered. This aspect increases employment because businesses hire additional workers to produce the extra output ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"jowWXKat","properties":{"formattedCitation":"(Girdzijauskas et al., 2022)","plainCitation":"(Girdzijauskas et al., 2022)","noteIndex":0},"citationItems":[{"id":3658,"uris":["http://zotero.org/users/local/MgqJMbgS/items/ZKGTXBXW"],"itemData":{"id":3658,"type":"article-journal","container-title":"Sustainability","issue":"1","note":"publisher: MDPI","page":"518","source":"Google Scholar","title":"New approach to inflation phenomena to ensure sustainable economic growth","volume":"14","author":[{"family":"Girdzijauskas","given":"Stasys"},{"family":"Streimikiene","given":"Dalia"},{"family":"Griesiene","given":"Ingrida"},{"family":"Mikalauskiene","given":"Asta"},{"family":"Kyriakopoulos","given":"Grigorios L."}],"issued":{"date-parts":[["2022"]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (Girdzijauskas et al., 2022). Employment and output increase similarly raise prices, with businesses transferring the increased production costs to consumers. When aggregate demand falls, it often causes a significant downturn in key economic measures like output performance, workforce participation rates, and inflation. Such effects occur because firms may be compelled to limit their production outputs to align with lowered demand. That means businesses require fewer employees during production, eventually increasing unemployment rates. To restore some business activity with lowered consumer demands, businesses reduce prices to sell their goods and services. An increase in AS leads to price falls since businesses can produce more goods and services. This aspect increases output and employment because businesses can sell more goods and services cheaply. Conversely, a fall in AS leads to a price increase since businesses cannot produce adequate goods and services at a similar price. This aspect decreases output and employment since businesses cannot sell many goods and services at the same price. The perspective of Keynesian economists places substantial importance on AD since they believe in the poten...