Macro Foundations · intro
What moves on the Aggregate Supply – Aggregate Demand diagram
G enters AD directly and is amplified by the multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case., shifting AD right by more than the initial spend.
Start at equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change..
The government launches a major spending program. G rises directly.
G is a component of aggregate demandaggregate demandTotal planned spending on an economy's output at each price level, consumption, investment, government, and net exports., and the multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case. amplifies the initial injection. AD shifts right strongly.
New equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change.: output rises; the price level rises too, more steeply if the economy was already near capacity.
Examiners ask this as: fiscal stimulus, government spending increase, infrastructure package, stimulus checks, expansionary fiscal policy.
Other scenarios on Aggregate Supply – Aggregate Demand