Business cycles
AD-AS approach
Introduction
To explain
business cycles mechanism two concepts – aggregate demand and aggregate supply
– are used.
Aggregate demand reflects total real expenditures on final
goods and services produced in the domestic economy that economic agents are
willing to undertake.
Aggregate supply reflects total real production producers are
able to provide.
Macroeconomy
is at its equilibrium when aggregate demand and aggregate supply are equal.
When this equilibrium occurs at the potential or full-employment level of GDP,
the economy is stable.
Both
aggregate supply and aggregate demand are constantly under the "attack" of many
factors affecting them. As a result the equilibrium level change and may move
away from the potential level. Decrease in aggregate demand or aggregate supply
bring GDP below potential level. Increase in aggregate demand or aggregate
supply take GDP above potential level. But how does it happen? To find
out, read through the following pages.