Abstract
This chapter reviews the interrelationship of aggregate supply and aggregate demand in the economy. Using supply and demand analysis, it examines the impact of changes in the aggregate demand and the aggregate supply, and it considers the consequences of this in terms of the equilibrium price and output, and employment. An increase in the aggregate demand will usually lead to an increase in price and output. The relative impact on price compared to output depends on the price elasticity of the aggregate supply. The government will try to influence both aggregate demand and aggregate supply with various policies such as fiscal, monetary, and exchange rate policies.
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