Aggregate supply and demand

Aggregate demand

Aggregate demand is defined as the total value of goods and services demanded within the local economy during a specific period of time, usually a year. The value of aggregate demand is distributed among the various elements of production, and the aggregate demand for a country's economy is calculated through the sum of society's consumption demand, investment demand, government spending, and net exports.

These purchasing plans occur based on several factors:

  • Price level: The quantity of GDP demanded is inversely related to the price level. An increase in prices reduces the quantity demanded, and vice versa. Higher prices lead to lower purchasing plans and thus aggregate demand.

  • Expectations: Expectations play an important role. Increased expectations of increased future income increase plans to purchase today, leading to increased aggregate demand. For example, expectations of future inflation may increase purchasing plans to avoid expected price increases.

  • Fiscal and monetary policy: Fiscal and monetary policies, such as taxes, government spending, and interest rates, affect aggregate demand. Changes in these policies can cause aggregate demand to increase or decrease.

  • International Economy: The effects of the exchange rate and foreign income play a role in determining aggregate demand. A rise in the exchange rate causes aggregate demand to fall, and an increase in foreign income increases exports and leads to an increase in aggregate demand.

Total width:

Aggregate supply is defined as the total value of goods and services produced or provided within a local economy during a given period of time, usually a year. The quantity of real GDP supplied is the total quantity of goods and services, estimated at constant prices, that firms plan to produce during a given period.

This quantity depends on the amount of labor used, the amount of physical and human capital and the state of technology. Aggregate supply refers to the relationship between the quantity of real GDP supplied and the price level. This long-term effect is different from its short-term effect. Through fluctuations in aggregate supply and aggregate demand, inflation, unemployment, or economic recession occurs.

If aggregate demand grows faster than maximum output capacity, this leads to a rise in the price level and the formation of an inflationary gap within the country. If aggregate demand grows at a slower pace, it causes aggregate demand to be less than the maximum capacity of output, causing the country's economy to enter an economic recession. In this case, the state takes a set of policies, such as fiscal or monetary policies, or increasing the money supply and setting the minimum wage, to avoid the economy falling into waves of inflation or recession.

Leave a Comment

Your email address will not be published. Required fields are marked *

Connect with us
💬 Let us help you
Welcome 👋
How can we help you?