In this paper, I would like to consider the basic model of macroeconomic equilibrium—the aggregate demand and aggregate supply model, or the AD-AS model. Aggregate supply and demand affect the establishment of an equilibrium general price level and an equilibrium volume of production in the economy as a whole (Gerber, 2018). All other things being equal, the lower the price level, the more of the national product consumers will want to purchase. This topic is applicable in day to day economic decisions since the AD-AS model allows an analysis of the main macroeconomic problems, such as unemployment, inflation, economic growth, and others.
Aggregate demand is the total planned expenditure on the purchase of final domestic goods and services over a year. With an increase in the price level, the level of aggregate demand decreases, and vice versa. Aggregate supply is understood as the total volume of final goods and services produced in the economy for the year, i.e. real GDP (Gerber, 2018). The economy is in equilibrium if the level of aggregate demand is equal to the level of aggregate supply. Changes in levels of aggregate demand and aggregate supply explain the changes in a country’s economy. Analysis of the AD-AS model shows that the laws of market equilibrium are valid at the level of the national economy as a whole. It explains the main forces at work in the economy and their consequences.
Knowledge of the AD-AS model allows understanding the mechanism of formation of markets and prices, ups and downs in the economy, and the economic behavior of consumers and organizations. It explains the advantages of specialization and exchange at the individual, regional, and international levels. In this regard, the study of macroeconomic laws, where a special place is occupied by the theory of aggregate demand and aggregate supply, as well as the problem of macroeconomic equilibrium is up to date.
Reference
Gerber J. (2018). International economics (7th ed.). Pearson Education.