3.2 ADAS

• Aggregate Demand represents the total quantity of goods and services demanded across all levels of an economy at a particular price level and in a given period.
• • Rightward Shift: An increase in any of the components (e.g., higher consumer spending due to increased disposable income) shifts the AD curve to the right.
• • Leftward Shift: A decrease in any of the components (e.g., reduced investment due to higher interest rates) shifts the AD curve to the left.
• Aggregate Supply represents the total quantity of goods and services that producers in an economy are willing and able to supply at a given overall price level in a given period.
• • SRAS is upward sloping because, in the short run, as prices increase, firms are willing to produce more due to higher profit margins.
  • Determinants include wage rates, raw material prices, productivity, and government regulations.
• • LRAS is vertical at the full employment level of output, indicating that in the long run, the economy's output is determined by its resources and technology, not the price level.
  • Determinants include technological advancements, labor force changes, and capital stock.
• • Rightward Shift: Improvements in productivity, technological advancements, or reductions in production costs can shift the AS curve to the right.
  • Leftward Shift: Increases in production costs, such as higher wages or raw material prices, can shift the AS curve to the left.
• • The short-run equilibrium is found where the AD curve intersects the SRAS curve.
  • This determines the current price level and output level in the economy.
• • The long-run equilibrium occurs where the AD curve intersects the LRAS curve.
  • At this point, the economy is at full employment, and output is at its potential level.
• • Positive Shock: An increase in consumer confidence leads to higher consumption, shifting the AD curve to the right, increasing output and price levels.
  • Negative Shock: A decrease in investment due to higher interest rates shifts the AD curve to the left, reducing output and price levels.
• Supply-Side Shocks

  • Positive Shock: A decrease in oil prices reduces production costs, shifting the SRAS curve to the right, increasing output and decreasing price levels.
  • Negative Shock: An increase in wages increases production costs, shifting the SRAS curve to the left, decreasing output and increasing price levels.