Economics Micro & Macro (CliffsAP)

Figure 4-7 shows an increase in aggregate demand. This increase shifts the economy into range 2. In this range,
we have a slight increase in the price level and growth. Full employment is reached and surpassed in this range.
Equilibrium GDP is enhanced as a result of an increase in aggregate demand.

Figure 4-7

Figure 4-8 illustrates what happens to an economy that can no longer employ any additional resources. Aggregate
demand has increased but the economy can no longer sustain growth. Firms begin raising their prices in an effort to
contain demand.

Figure 4-8

Figure 4-9 shows what happens to the economy when both aggregate supply and aggregate demand shift to the right.
The initial shift to the right by the aggregate demand curve prompts the economy to move into stage 3. Initially, the
economy cannot sustain this growth, so the price level rises. However, with an increase in aggregate supply, the econ-
omy has increased its productive capacity. This effect has stabilized the price level and allows firms to employ more
resources.

Price

Level

Output/GDP

AS

AD^1

AD^2

AD^3

Price

Level

Output/GDP

AS

AD^1 AD^2

Aggregate Expenditures, Aggregate Supply and Aggregate Demand Models