ECON 105

What moves output and the price level?

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Move aggregate demand and supply to explore equilibrium, shocks, output gaps and wage adjustment. Then solve ten questions with editable numbers and worked answers.

Demand and short-run supply · Step 1 of 12

A higher price level reduces output demanded

Invented economy: aggregate demand and supply

Price level (index)

Real GDP ($ billion)

ADE: output 800 ($ billion), price 120.0

Demand and short-run supply · Step 1 of 12

A higher price level reduces output demanded

Aggregate demand (AD) is planned spending on the economy's output at each aggregate price level. Higher prices reduce the buying power of money wealth and raise money demand, which raises interest rates and reduces spending. Our invented economy, Lantern Isles, uses straight lines to make the arithmetic clear; real curves need not be straight.

Try it: Move the price level, then choose each reason for the downward slope.

Aggregate price level (index)120.0

Which mechanism?

Price index

120.0

Output demand

800

AD: P = a − b × Y = 200 − 0.1 × Y

Y = (a − P) ÷ b = (200 − 120.0) ÷ (0.1) = 800 ($ billion)

Price level ↑ → money wealth buys less → consumer spending ↓.

Check yourself

Only the price level changes. Does AD shift?

Exam coming up and demand and supply shocks still feel confusing?

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What moves output and the price level?

A higher price level reduces output demanded

A higher price level reduces output demanded

Find Lantern Isles' short-run equilibrium

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