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Aggregate demand (AD) and aggregate
supply (AS) curves look and operate much
like the market supply and demand cm'ves
used in microeconomlcs. However, aggregate
demand and aggregate supply curves depict
somewhat different concepts, and they
change for different reasons. AD and AS
curves are used to illustrate changes in real
output and the price level of an economy.
Shifts in AD can change the level of output,
the price level or both. The determinants of
AD include consumer spending, investment
spending, government spending, net export
spending, and government policies.
The downward slope of the AD curve is
explained by the interest rate effect, the wealth
effect, and the net export effect. The wealth.
effect is also called the real-balance effect.
The upward slope of the short-run aggregate
supply curve (SRAS) is explained by fixed
input costs (e.g., sticky wages). The long-rmÿ
aggregate supply (LRAS) curve is vertical at
the full-employment level of output.
The marginal propensity to consume (MPC) is
the additional consumption spending from
an additional dollar of income. The marginal
propensity to save (MPS) is the additional
savings from an additional dollar of income.
MPC + MPS = 1.
The spending multiplier shows the
rdationship between changes in spending
and the maximum resulting changes in
real gross domestic product (GDP). The
simple spending multiplier is given as: