Question

Using the concepts of aggregate demand and aggregate supply, explain how the economy reaches an equilibrium level of real GDP and price level.

Answer 1

Aggregate demand is a sum total of all the demand in the market and aggregate supply is sum total of all the supply in the market.

When the price is high in the market, there will be excess supply in the market and lower demand , this will force the price down and if the price of the goods in the market is low the demand will be high and supply will be less causing a shortage, this will force the price up, movement of the price will continue to the point were the demand and the supply are both equal, here the market will be at the equilibrium level.