Chapter 24, Problem 24.1.1RQ

To determine

Relations explained by Aggregate demand and Aggregate supply curves.

Explanation of Solution

The demand comes from all the economic agents such as the households, firms as well as the government. The demand depends on the price level of the economy. The increase and decrease in the price level determines the level of demand in the economy. The aggregation of all the individual demands in the economy is known as the aggregate demand and thus, the aggregate demand explains the relationship between the general price level and the level of real GDP demanded in the economy by the economic agents such as the households, firms and the government.

Similarly, the supply also depends on the price level in the economy. When the price level is higher, the suppliers will be receiving a higher income and this would incentivize them to increase the supply in the economy and vice versa. The aggregation of the supply curves of all the firms in the economy is known as the aggregate supply curve. In the short run period, the aggregate supply curve represents the relationship between the price level in the economy and the supply by the firms. In the long run period, the aggregate supply curve represents the relationship between the price level in the economy and the quantity of real GDP supplied by the firms in the economy.

Economics Concept Introduction

Concept introduction:

Aggregate Demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate Supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.