Question

-refully Using aggregate supply and aggregate demand curves, illustrate and summarize what impact each of the would have on the price level and the equilibrium level of aggregate output in the short run.

Answer 1

Impact of increasing aggregate demand on the following:

a) Price level: General price level rises because the increased aggregate demand will lead to inflationary gap .

b) Equilibrium level of output in the short run: It shifts to the right of the X-axis as given in the diagram , implying the new equilibrium level of aggregate level of output is greater then the earlier level.

Reason for gaining productivity because of increasing aggregate demand: The level of output(in terms of the quantum of goods and services) cannot be raised, owing to the fact that the available resources are already fully utilized. At best, excess demand raises the market value of the output. Because quantum of output remaining constant, higher demand leads to a rise in the general price level, implying a situation of inflationary gap.

y = Expenditure - AD 2 UR: pupunda opofoobby KADI -- ☆ sx M Income foutput Index . AD, :- (Before increasing) aggregate demand curve 16) AD2 - (After increasing aggregate demand curve - EF - Excess demand in the economy 1. E:- Equilibrium point of AD, -7 G = Neco equilibrium point of ADą 1. M :- Equilibrium level of output corresponding to -N :-New equilibrium level of output corresponding to c Scanned AD 12 CamScanner