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How aggregate supply & demand are measured and used in setting economic policy.

How aggregate supply & demand are measured and used in setting economic policy.

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Aggregate demand is composed of the expenditure that is incurred in the heads of consumption investment government expenditure and net Exports. When the expenditure on all these activities are added we get to know the aggregate demand function. Aggregate supply in contrast is the total output produced by all the sectors in the nation which is basically measured as the value of the output produced within the domestic Territory of the economy.

Both are the function of prices. While the aggregate demand is downward sloping against price aggregate supply slopes upwards. Their interaction determine the short run equilibrium in the economy establishing the price level as well as the real GDP in the short run.

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