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Aggregate Demand and Aggregate Supply
Aggregate Demand and Aggregate Supply
Aggregate Demand and Aggregate Supply
AD = C + I + G + NX
AD on Graphs
• Aggregate supply
The aggregate supply can be defined as the total amount of money earnings
which the firms in the economy taken together ‘must receive’ from the sale of
their product at fluctuating levels of employment.
Thus, the aggregate supply schedule like the aggregate demand schedule, is
also an increasing function of the level of employment.
AS = f(N)
• an increase in autonomous
investment expenditure ΔI shifts
the desired spending function
from AE0 to AE1
Reduction In Stock
When S > I
Accumulation In Stock
Produce Less
■ It is evident from above that when income increases from Yt-1 in period t-
1 to Yt in period, t, then the stock of capital will increase from Kt-1 to Kt.
■ From above we can see that , Kt-1 is equal to vYt-1 and Kt is equal to
vYt.. Therefore, the increase in the stock of capital in period t is given by
the following equation: Kt – Kt-1 = vYt – vYt-1
Effects of Money Supply on
AD and AS
• Transmission of Monetary Policy - Expansionary
Central Bank shifts to a more expansionary Monetary Policy by
purchase of bonds to increase the money supply
Diagram
This Leads to
a short-run increase in output
Diagram
3) Business Circle
The Impacts On Indian Economy
• National Income
• Household Consumption Expenditure
• HFCE
• Business Circle
Monetary Tools used to
measure AD / AS
• Fiscal Policy to fight Inflation
• Monetary Policy and Bank Regulation
• Threat of Recession –
• Usage of Expansionary Fiscal Policy
• Increase In money supply, quantity of loans and
reduction of interest
• Shifts aggregate Demand curve to the right