Question

Aggregate supply and demand in comparison with the aggregate expenditure model

Answer 1

In economics, aggregate supply (AS) is the total supply of goods and services generated by firms in an economy over a given period of time. It reflects the total quantity of products and services that businesses are prepared to offer at a given price point. In the short-run and in the long-run vertical, the aggregate supply curve is graphed as a backward L-shape. The aggregate demand (AD) is the overall demand in the economy at a given time and price level for the final goods and services. It displays the amounts of products and services which are to be purchased at all possible price levels. As aggregate demand rises to the right the graph moves.

When it falls it moves to the left which indicates a decline in production and prices. Production and price for goods and services are determined by the aggregate supply and aggregate demand. The model AD-AS is used to calculate the gross expenditure and the balance point.

The aggregate expenditure is the amount of all the expenditure incurred by the variables in the economy over a given period of time. The equation is: C + I + G + NX = AE.
The aggregate expenditure specifies the total amount that businesses and households are preparing to spend on goods and services at each revenue level. The gross expenditure is one of the instruments used to measure the overall amount of all economic operations in an economy also known as the GDP. If there is excess supply over the demand, either the prices or the quantity of the production will be decreased, which will decrease the economy's overall output (GDP).

When there is an excess of supply spending, there is excess demand which leads to price or production (higher GDP) increases.