Question

27. The aggregate supply curve has a significantly different curve or arc to it than the aggregate demand curve. What is one of the key reasons for the different shape of the aggregate supply curve?

Answer 1

Answer:

Aggregate Supply = National Income

Explanation:

Aggregate Demand is total value of goods & services buyers are planning to consume. In a closed un-intervened economy : AD = Consumption (C) + Investment (I) ,C is positively related with income (Y) & I assumed to be autonomous .

So the AD curve (plotted against Y) has an upward sloping curve (∵Y, C +ve relationship) having intercept on Y axis (∵ equal to autonomous C, I).

Aggregate Supply AS is the total value of goods & services producers are planning to sell. It is equal to National Income because : this producers' desired/ planned production level yields incomes which is distributed as factors incomes to factors of production. And, Income is either consumed or saved . So AS = C + S (Saving)

Hence , AS (C+S) plotted against Y , is an upward sloping 45° line . Because such line has a special feature of having equal distance from X & Y axis & the things magnitude on both axis is equal , like Y = AS (i.e C +S)