Aggregate (Economy) Equilibrium

Question 1

What is the effect on aggregate equilibrium of a decrease in aggregate demand (only) when a Conventional supply curve is assumed?

Answer 1

Since the Conventional supply curve has a continuous positive slope, as Aggregate Demand decreases both supply (quantity) and price will decrease.

Question 2

What determines aggregate equilibrium for an economy?

Answer 2

The level of output and price at which aggregate demand and aggregate supply are equal.

Question 3

What factors determine the effect of a change in aggregate supply (alone) on aggregate equilibrium?

Answer 3

Two factors:

1. Which Aggregate Supply Curve is assumed
2. Direction of change in the Aggregate Supply Curve

Question 4

What is the effect on aggregate equilibrium of an increase in aggregate demand (only) when a Keynesian supply curve is assumed?

Answer 4

Since the Keynesian supply curve is horizontal up to the point of full employment, as Aggregate Demand increases, there will be an increase in supply (quantity) with no change in price until the level of full employment is reached, at which point both quantity and price increase.

Question 5

What is the effect on aggregate equilibrium of an increase in aggregate demand (only) when a Classical supply curve is assumed?

Answer 5

Since the Classical supply curve is completely vertical, an increase in Aggregate Demand (alone) will increase price with no change in the quantity supplied.