Final answer:
Aggregate demand is the total spending on domestic goods and services, reflected in the AD curve, while aggregate supply is the total goods and services firms are ready to produce and is depicted by the AS curve. The AD/AS model explains interaction and outcomes in an economy's overall activity.
Step-by-step explanation:
The term aggregate demand (AD) pertains to the total amount of spending on domestic goods and services in an economy. This is represented by the aggregate demand curve, which shows spending levels at various price points. Conversely, aggregate supply (AS) refers to the total quantity of goods and services that firms are willing and able to produce and sell, usually outlined in the aggregate supply curve. The aggregate demand/aggregate supply model is critical in macroeconomics as it helps explain the interaction between total demand and total supply in the economy, thereby illustrating factors like output levels and price.
Several factors can influence aggregate demand, including consumption, investment, government spending, and net exports (exports minus imports). The aggregate supply reflects how producers respond to changes in the price level of outputs, with greater supply at higher prices. This model also helps analyze the impact of various economic events and policy decisions on overall economic activity.