Aggregate Supply and Demand

Aggregate Supply and Demand

Mike Clyburn

ECO372

23 July 2012

Justin White

Aggregate Supply and Demand

Aggregate supply and demand introduces the demands of a population in goods and services and the supply of these goods and services to the population. The general theory of supply and demand determining prices does not always hold true. There are certain goods and services that have other factors involved that also help determine their price levels. Since this will be a macroeconomic issue, we will be focusing on goods and services as a whole instead of in the microeconomic view of an industry or part of that industry. The Aggregate Demand curve always slopes downward due to the main fact of that when prices fall, demand should rise. Three of the factors that affect this curve are called the Interest Rate effect, the International effect, and the Money Wealth effect.

The Interest rate effect comes into play when prices are low. If prices are low, you have more money to spend on other items or things. You also have more opportunity to save. When people save more, this allows banks to lend more money which in turn allows interest rates to fall. When interest rates are low, businesses will tend to have more investment expenditures. This will increase aggregate quantity as prices fall. The International effect is the same supply and demand theory, but takes it across countries instead of keeping it within one’s borders. If the exchange rate of currencies remain the same and prices fall for one country’s goods, it will make that country more competitive with its exports to other countries. The demand for that country’s goods will increase which would increase that country’s exports and decreasing its imports.

The Money Wealth effect is the basic supply and demand theory. If prices fall, one has more money than before. This would allow the purchase of more items and in turn the demand for more production.

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