• Unit 3: Aggregate Demand, Supply, and Equilibrium

    In this unit, we explore the forces affecting growth, inflation, and unemployment at the aggregate level, such as output, income, or the components within GDP. Aggregate demand is the total amount of goods and services people want to purchase. It measures what people want to buy rather than what is produced. The aggregate demand is the sum of consumption, investment, government expenses, and net exports. Aggregate supply is an economy's total output at a given price level. We consider aggregate supply in the short run and the long run.

    Completing this unit should take you approximately 3 hours.

    • 3.1: Aggregate Demand

      Aggregate demand is the total demand for all finished goods and services produced domestically in an economy. If consumer consumption rises because many people are employed and spending more, aggregate demand for goods and services will increase. Additionally, if investment increases due to a decrease in interest rates, production and output will increase. Therefore, aggregate demand will rise.

    • 3.2: Aggregate Supply

      Aggregate supply (AS) is the total quantity of output firms produce and sell (in other words, real GDP). The aggregate supply (AS) curve shows the total quantity of output firms produce and sell at each price level. Aggregate demand (AD) is the total spending on domestic goods and services in an economy. The aggregate demand (AD) curve shows the total spending on domestic goods and services at each price level.

    • 3.3: Aggregate Supply in the Short-Run and the Long-Run

      Short-run aggregate supply is upward-sloping and represents the total production of goods and services available in an economy at different price levels while some resources are fixed. The long-run aggregate supply is an economy's production level when all available resources are used efficiently. It equals the highest level of production an economy can sustain. Changes in prices of factors of production shift the short-run aggregate supply curve. Changes in capital stock, the stock of natural resources, and technology levels can also cause the short-run aggregate supply curve to shift. The long-run aggregate supply curve is perfectly inelastic and vertical because firms can adapt to price-level changes better in the long run than in the short run.

    • 3.4: Short-Run and Long-Run Macroeconomic Equilibrium

      In macroeconomics, the short run is the period when wages and some other prices are sticky. The long run is the period when full wage and price flexibility, and market adjustment, are achieved – when the economy is at the natural level of employment and potential output. In this section, we explore aggregate economic equilibrium in the short and long run. At a macro level, equilibrium is where aggregate supply equals aggregate demand. We examine shifts in aggregate supply and demand and the short-term and long-term effects on the economy.

    • Unit 3 Assessment

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