Aggregate demand (AD) represents the total demand for all goods and services in an economy at a given price level. It slopes downward because as prices fall, consumers and businesses tend to buy more. Aggregate supply (AS) represents the total supply of goods and services in an economy at a given price level. The short-run AS curve typically slopes upward, reflecting that firms can increase output in response to higher prices, but this effect is limited by resource constraints. The intersection of AD and AS determines the equilibrium price level and output in the economy.
Match the terms with their definitions:
| Term | Definition |
|---|---|
| 1. Aggregate Demand | A. The total quantity of goods and services firms are willing to produce at each price level. |
| 2. Aggregate Supply | B. A period of decline in total output, income, and employment. |
| 3. Inflation | C. A general increase in prices and fall in the purchasing value of money. |
| 4. Recession | D. The total demand for final goods and services in the economy at a given price level. |
| 5. Equilibrium | E. A state of balance where aggregate demand equals aggregate supply. |
Complete the following paragraph using the words: increase, decrease, price level, output, aggregate demand.
A shift in ___________ to the right will generally cause the ___________ and ___________ to rise. A shift to the left will cause them to ___________.
Explain how an increase in government spending could impact both aggregate demand and aggregate supply in the short run. π
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