Assignment
Graph description. Aggregate demand and aggregate supply curves show how much goods and services national economy can purchase and produce at various prices and within a specific time frame. The point of macro equilibrium is the level of price and output, at which aggregate demand matches aggregate supply. Under the ceteris paribus assumption, the economy will always go back to the state of macro equilibrium. However, in the short-run changes in the economy are not immediately followed by a change in the supply-demand pattern. That leads to surpluses or shortages of products and services that make the economy less efficient. In the long-run demand and supply adjust to the level, where quantity supplied is equal to the quantity demanded and the macro equilibrium is achieved again.
2. Demand-pull inflation can be broadly defined as a general increase in prices that is driven by an increase in the total demand within the economy. Demand-pull inflation is usually caused by rising consumer spending, which exceeds the ability of suppliers to provide goods and services demanded. Following the law of supply and demand, suppliers respond to higher demand by raising their prices. This phenomenon is usually observed only in the short-run, as in the long-run producers tend to expand their production to meet higher demand, thus lowering market prices. Alternatively, consumers may shift to more abundant substitute products, which ultimately reduces the pressure on supply.
2. Cost-push inflation is an overall economy price increase that is usually driven by higher cost of production. Cost-push inflation can be caused both by an overall cost increase for businesses or by companies’ attempt to increase profitability by raising market prices.
3. Deflation is defined as a decrease of average prices for goods and services in the economy. It can be caused by lower spending that leads to a supply surplus in the economy, thus driving prices down. In the long run, as the economy adjusts to deflations, many businesses may have to close down their under the pressure put by low prices. As a result aggregate supply will increase, and the market will come to an equilibrium again.
References
Tucker, I. (2014). Macroeconomics for today (8th ed.). Cincinnati, OH: South-Western College.
