Find any two different newspap

Find any two different newspaper articles, one about an increaseor decrease in Aggregate Demand and one about an increase ordecrease in Aggregate Supply (the article has to be something thatincludes the entire economy/all goods and services produced/RealGDP, not just one company or industry). Explain what the article isabout (one at a time) and why it is an example of AD or ASshifting. In your analysis of each shift, explain why this articleis an example of the shift and explain what would be happening inthe graph in detail, including changes in equilibrium price leveland real GDP as a result of the shift. include two correct graphsabout each article of Aggregate Demand and Aggregate Supply graph.Aggregate Demand article:


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Aggregate demand and aggregate supply curves:

Key points

  • Aggregate supply is the total quantity ofoutput firms will produce and sell—in other words, the realGDP.

  • The upward-sloping aggregate supply curve—alsoknown as the short run aggregate supplycurve—shows the positive relationship between price leveland real GDP in the short run.

  • The aggregate supply curve slopes up because when the pricelevel for outputs increases while the price level of inputs remainsfixed, the opportunity for additional profits encourages moreproduction.

  • Potential GDP, or full-employmentGDP, is the maximum quantity that an economy can producegiven full employment of its existing levels of labor, physicalcapital, technology, and institutions.

  • Aggregate demand is the amount of totalspending on domestic goods and services in an economy.

  • The downward-sloping aggregate demand curveshows the relationship between the price level for outputs and thequantity of total spending in the economy.


To understand and use a macroeconomic model, we first need tounderstand how the average price of all goods and services producedin an economy affects the total quantity of output and the totalamount of spending on goods and services in that economy.

The aggregate supply curve

Firms make decisions about what quantity to supply based on theprofits they expect to earn. Profits, in turn, are also determinedby the price of the outputs the firm sells and by the price of theinputs—like labor or raw materials—the firm needs to buy.Aggregate supply, or AS, refers to the totalquantity of output—in other words, real GDP—firms will produce andsell. The aggregate supply curve shows the total quantityof output—real GDP—that firms will produce and sell at each pricelevel.

The graph below shows an aggregate supply curve. Let’s begin bywalking through the elements of the diagram one at a time: thehorizontal and vertical axes, the aggregate supply curve itself,and the meaning of the potential GDP vertical line.

The aggregate supply curve

The graph shows an upward sloping aggregate supply curve. Theslope is gradual between 6,500 and 9,000 before become steeper,especially between 9,500 and 9,900.

Image credit: Figure 1 in “Building a Model ofAggregate Demand and Aggregate Supply” by OpenStaxCollege, CC BY4.0

The horizontal axis of the diagram shows real GDP—that is, thelevel of GDP adjusted for inflation. The vertical axis shows theprice level. Price level is the average price of all goods andservices produced in the economy. It’s an index number, like theGDP deflator.

[Wait, what’s a GDP deflator again?]

Notice on the graph that as the price level rises, the aggregatesupply—quantity of goods and services supplied—rises as well. Whydo you think this is?

The price level shown on the vertical axis represents prices forfinal goods or outputs bought in the economy, not the price levelfor intermediate goods and services that are inputs to production.The AS curve describes how suppliers will react to a higher pricelevel for final outputs of goods and services while the prices ofinputs like labor and energy remain constant.

If firms across the economy face a situation where the pricelevel of what they produce and sell is rising but their costs ofproduction are not rising, then the lure of higher profits willinduce them to expand production.

Potential GDP

If you look at our example graph above, you’ll see that theslope of the AS curve changes from nearly flat at its far left tonearly vertical at its far right. At the far left of the aggregatesupply curve, the level of output in the economy is far belowpotential GDP—the quantity that an economy can produce byfully employing its existing levels of labor, physical capital, andtechnology, in the context of its existing market and legalinstitutions.

At these relatively low levels of output, levels of unemploymentare high, and many factories are running only part-time or haveclosed their doors. In this situation, a relatively small increasein the prices of the outputs that businesses sell—with no rise ininput prices—can encourage a considerable surge in the quantity ofaggregate supply—real GDP—because so many workers and factories areready to swing into production.

As the quantity produced increases, however, certain firms andindustries will start running into limits—for example, nearly allof the expert workers in a certain industry could have jobs orfactories in certain geographic areas or industries might berunning at full speed.

In the intermediate area of the AS curve, a higher price levelfor outputs continues to encourage a greater quantity of output,but as the increasingly steep upward slope of the aggregate supplycurve shows, the increase in quantity in response to a given risein the price level will not be quite as large.

At the far right, the aggregate supply curve becomes nearlyvertical. At this quantity, higher prices for outputs cannotencourage additional output because even if firms want to expandoutput, the inputs of labor and machinery in the economy are fullyemployed.

In our example AS curve, the vertical line in the exhibit showsthat potential GDP occurs at a total output of 9,500. When aneconomy is operating at its potential GDP, machines andfactories are running at capacity, and the unemployment rate isrelatively low at the natural rate of unemployment. For thisreason, potential GDP is sometimes also called full-employmentGDP.

Why does AS cross potential GDP?

The aggregate supply curve is typically drawn to cross thepotential GDP line. This shape may seem puzzling—How can an economyproduce at an output level which is higher than its potential orfull-employment GDP?

The economic intuition here is that if prices for outputs werehigh enough, producers would make fanatical efforts to produce: allworkers would be on double-overtime, all machines would run 24hours a day, seven days a week. Such hyper-intense production wouldgo beyond using potential labor and physical capital resourcesfully to using them in a way that is not sustainable in the longterm. Thus, it is indeed possible for production to sprint abovepotential GDP, but only in the short run.

So, in the short run, it is possible for producers to supplyless or more GDP than potential if demand is too low or too high.In the long run, however, producers are limited to producing atpotential GDP.

For this reason, economists also refer to the AS curve as theshort run aggregate supply curve, or SRAScurve. The vertical line at potential GDP may also bereferred to as the long run aggregate supplycurve, or LRAS curve.

The Aggregate Demand Curve

Aggregate demand, or AD, refers to the amountof total spending on domestic goods and services in an economy.Strictly speaking, AD is what economists call total plannedexpenditure. We’ll talk about that more in other articles, but fornow, just think of aggregate demand as total spending.

Aggregate demand includes all four components of demand:

  • Consumption
  • Investment
  • Government spending
  • Net exports—exports minus imports

This demand is determined by a number of factors; one of them isthe price level. An aggregate demand curve shows the totalspending on domestic goods and services at each price level.

You can see an example aggregate demand curve below. Just likein an aggregate supply curve, the horizontal axis shows real GDPand the vertical axis shows price level. But there’s a bigdifference in the shape of the AD curve—it slopes down. Thisdownward slope indicates that increases in the price level ofoutputs lead to a lower quantity of total spending.

The aggregate demand curve

The graph shows a downward sloping aggregate demand curve,showing that, as the price level rises, the amount of totalspending on domestic goods and services declines.

Image credit: Figure 2 in “Building a Model ofAggregate Demand and Aggregate Supply” by OpenStaxCollege, CC BY4.0

Let’s dig a little deeper. To fully understand why price levelincreases lead to lower spending, we need to understand how changesin the price level affect the different components of aggregatedemand. Remember, the following components make up aggregatedemand: consumption spending, \text{C}Cstart text, C, end text;investment spending, \text{I}Istart text, I, end text; governmentspending, \text{G}Gstart text, G, end text; and spending onexports, \text{X}Xstart text, X, end text, minus imports\text{M}Mstart text, M, end text.

\text{Aggregate demand} = \text{C} + \text{I} + \text{G} +\text{X} – \text{M}Aggregate demand=C+I+G+X−Mstart text, A, g, g,r, e, g, a, t, e, space, d, e, m, a, n, d, end text, equals, starttext, C, end text, plus, start text, I, end text, plus, start text,G, end text, plus, start text, X, end text, minus, start text, M,end text.

The wealth effect holds that as the price level increases, thebuying power of savings that people have stored up in bank accountsand other assets will diminish, eaten away to some extent byinflation. Because a rise in the price level reduces people’swealth, consumption spending will fall as the price levelrises.

The interest rate effect explains that as outputs rise, the samepurchases will take more money or credit to accomplish. Thisadditional demand for money and credit will push interest rateshigher. In turn, higher interest rates will reduce borrowing bybusinesses for investment purposes and reduce borrowing byhouseholds for homes and cars—thus reducing both consumption andinvestment spending.

The foreign price effect points out that if prices rise in theUnited States while remaining fixed in other countries, then goodsin the United States will be relatively more expensive compared togoods in the rest of the world. US exports will be relatively moreexpensive, and thus the quantity of exports sold will fall. Importsfrom abroad will be relatively cheaper, so the quantity of importswill rise. Thus, a higher domestic price level, relative to pricelevels in other countries, will reduce net export expenditures.

Truth be told, among economists, all three of these effects arecontroversial, in part because they do not seem to be verylarge.

For this reason, the aggregate demand curve in our exampleaggregate demand curve above slopes downward fairly steeply. Thesteep slope indicates that a higher price level for final outputsdoes reduce aggregate demand for all three of these reasons, butthe change in the quantity of aggregate demand as a result ofchanges in price level is not very large.


  • Aggregate supply is the total quantity of output firmswill produce and sell—in other words, the real GDP.

  • The upward-sloping aggregate supply curve—also known asthe short run aggregate supply curve—shows the positiverelationship between price level and real GDP in the short run.

  • Aggregate supply curves slope up because when the price levelfor outputs increases while the price level of inputs remainsfixed, the opportunity for additional profits encourages moreproduction.

  • Potential GDP, or full-employment GDP, is themaximum quantity that an economy can produce given full employmentof its existing levels of labor, physical capital, technology, andinstitutions.

  • Aggregate demand is the amount of total spending ondomestic goods and services in an economy.

  • The downward-sloping aggregate demand curve shows therelationship between the price level for outputs and the quantityof total spending in the economy.

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