Question

What are the factors that affect Aggregate Demand and Aggregate Supply Curves? Why they are downward sloping, upward sloping and vertical, respectively? Answer

Answer 1

Factor affecting Aggregate demand curve

1. Net Export Effect

2. Real Balances

3. Interest Rate Effect

4. Inflation Expectations

Factor affecting Aggregate supply

1. Supply Shocks

2. Resource Price Changes

3. Changes in Expectations for Inflation

4. Capacity Increase

aggregate demand curve slopes downward due to reason that when price level down , consumers are likely to have higher disposable income and therefore spend more. Increase in demand for exports & Lower interest rates also cause aggregate demand curve to slopes downward and demand for goods increases.

The aggregate supply curve slopes upward because when price level of input is fixed then  the price level for outputs increases it will have the opportunity for additional profits to be raised with more production

aggregate supply curve is vertial at potential level of output when all the resources in the economy are employed and further there is no chance of increasing in the potential output