Aggregate Demand and Supply

Evaluate the extent to which an increase in aggregate demand may affect real output, inflation and unemployment. [25]

Real output is an abbreviation for Real Gross Domestic Product or (Real GDP) is a macroeconomics measure of the value of economic output adjusted for price changes, this adjustment transforms the money-value measure, nominal GDP, into an index for quantity of total output. Inflation is the increase in general price level over a sustained period of time. Then unemployment is the number if people out of work, which is measure at a point in time, these people out of work are willing and able to hold a job but are unable to find one. Aggregate demand is the total of all demands or expenditures in the economy at any given price. It is created with four factors; Consumption [C], Investment [I], Government Spending [G] and Exports minus imports [X-M]. Creating the formula of: AD = C + I + G + (X-M). Consumption is the total spending by households on goods and services, Investment is the spending by firms on investment goods, Government Spending includes the current spending, for instance on wages and salaries and also includes spending by government, Imports are goods and services which are coming from a foreign, and Exports are good and services going out of a country.

Aggregate supply is the total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is split into Long Run Aggregate Supply [LRAS] and Short Run Aggregate Supply [SRAS]. In the short run it is assumed that the prices of the factors of production, such as wage rates remain constant; if a firms costs of production increase then it will cause a shift in the aggregate supply to move upwards; and vice versa. In the long run it is assumed that the prices of factors of production are variable but