AD and SRAS

The equilibrium price level is at P* where aggregate demand (AD) equals short-run aggregate supply (SRAS). If the price level fell below P* then AD>SRAS, if prices go above P* then AD<SRAS.

Aggregate Demand (AD)

Definition= Is the total level of planned spending in an economy over a given time period.

The Aggregate demand curve:

i.e a curve relating price level to total spending in the economy

The AD curve slopes downwards as:

1. As price level falls international competitiveness rises therefore imports (a withdrawal) fall and exports (an injection) rise therefore AD rises.
2. As price level falls real incomes and real wealth rise therefore consumption rises.

NOTE: A change in the price level will move the economy along the AD curve whereas a change in any other determinant will cause a shift in the AD curve.

Inflation= average/general increase in prices

Real inflation= adjusted inflation

Determinants of AD include:

1. Investment (I)
2. Consumption (C)
3. Government Spending (G)
4. Exports (X)
5. Imports (M)

AD= C + I + G + X - M