Aggregate demand (AD) is the total demand for final goods and services in the economy at a given time and (average) price level (APL). An aggregate demand curve is the sum of individual demand curves for different sectors of the economy : AD = C (consumption) + I (investment) + G (government) + (X-M) net exports. Consumption is the total spending by consumers on domestic g/s, investment (I) is the addition of capital stock to the economy done by firms, government spending (G) is money (from taxpayers) spent on g/s and is altered by fiscal and monetary policy, and net exports (NX) are exports (domestic g/s bought by foreigners) minus imports (foreign g/s bought by domestic households, firms and/or government).
Aggregate supply (AS) is the total supply of goods and services that firms are prepared to sell at a given time and (average) price level (APL). In the short run, the SRAS is upward-sloping because as more output is produced, firms must pay higher production costs (i.e. pay more for overtime, bid higher prices for scarcer raw materials), and firms pass these higher prices off in the form of a higher average price level. Short run macroequilibrium occurs at the price level APL* when all the output produced by the country’s firms is consumed (Y1). Firms have no incentive to raise prices or increase output.
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