Question

The intersection of the aggregate demand and aggregate supply curves determines the:

a. horizontal range of the aggregate supply curve.
b. equilibrium level of real domestic output and prices.
c. vertical range of the aggregate supply curve.
d. economic growth and inflation

Answer 1

The intersection of the aggregate demand and aggregate supply curves determines the equilibrium level of real domestic output and prices in the economy. At this point, the quantity of all goods and services demanded equals the quantity supplied. Option (b) is the correct answer to the student’s question.

Step-by-step explanation:

The intersection of the aggregate demand (AD) and aggregate supply (AS) curves is a crucial concept in economics that determines the equilibrium level of real domestic output and prices. At the point where these two curves intersect, the economy is said to be in equilibrium, meaning the quantity of goods and services demanded equals the quantity supplied. To understand this better, let's break down the components.

The aggregate demand curve represents the total quantity of all goods and services demanded by the economy at different price levels. This includes consumption spending (C), investment spending (I), government spending (G), and net exports (X - M). As the price level increases, the quantity of total spending decreases, which is why the AD curve slopes downward.

On the flip side, the aggregate supply curve shows the total quantity of goods and services that producers are willing and able to supply at different price levels. Typically, at lower price levels, producers supply less because they earn lower revenues for their goods and services. As prices rise, they have more incentive to produce more, leading to an upward sloping AS curve.

When we talk about the equilibrium in the aggregate demand/aggregate supply model, we refer to the point where the AD and AS curves intersect. This point reflects both the equilibrium level of real GDP (or real domestic output) and the equilibrium price level in the economy. Hence, the correct answer to the question is option (b): 'the equilibrium level of real domestic output and prices.' This equilibrium is dynamic and can shift with changes in various economic factors such as consumer confidence, resource costs, and government policy.

Answer 2

The intersection of the aggregate demand and aggregate supply curves determines the equilibrium level of real domestic output and prices, indicating the state of balance in the economy where there is no excess supply or demand. Option B is the correct answer.

Step-by-step explanation:

The question at hand is concerned with the concept of equilibrium in the context of macroeconomics, specifically within the Aggregate Demand/Aggregate Supply model. The intersection of the aggregate supply (AS) and aggregate demand (AD) curves is a critical point that signifies the equilibrium state of an economy. This is where the real Gross Domestic Product (GDP) and the price level balance out, indicating the amount of goods and services produced within the economy, and the price at which they're sold.

When we consider the AS/AD model, we should think of the AD curve as reflecting the entire spending on the nation's goods and services at various price levels, including components like consumption spending, investment spending, government spending, and net exports. This curve slopes downwards, indicating that higher price levels can lead to a decline in the aggregate quantity of goods and services demanded.

On the flip side, the AS curve showcases the total production that businesses are willing and able to provide at different price levels. As prices rise, it's typical for supply to increase as well—firms are generally more incentivized to produce more when they can sell their goods at higher prices, up to a certain point.

Therefore, the point at which these two curves meet is where neither excess supply nor excess demand exists. The economy finds its balance here, determining both the equilibrium level of real domestic output (real GDP) and corresponding prices. Any fluctuation away from this point would lead to either excess supply (surpluses) or excess demand (shortages), prompting adjustments in price levels and output until equilibrium is restored.

The correct answer to the question, "The intersection of the aggregate demand and aggregate supply curves determines the," is b. equilibrium level of real domestic output and prices.