Principles of Macroeconomics/Aggregate Activity and Demand/Macro economy model

4.3.1 Aggregate demand and aggregate supply curves
The "Aggregate Demand” video lecture assigned above covers this topic. Please pay special attention to the components that constitute aggregate demand and the factors that affect each of these components, resulting in shifts of the AD curve. These lecture notes also explain why the AD curve is negatively-sloped. If you have studied microeconomics, you may remember that the reason for the negative slope of the AD curve is different than what it was for the individual/market demand curve. For Aggregate Supply (AS), please be aware of the distinction between the Short-Run AS curve and the Long-Run AS curve and the factors that lead to shifts or changes in the two curves, respectively. Finally, look at how the AD and the AS interact to reach equilibrium.

The aggregate demand curve slopes downward due to the price level and consumption (i.e., the wealth effect), the price level and investment (i.e., the interest rate effect), and the price level and net exports (i.e., the exchange rate effect).

There are numerous factors that affect the quantity of goods and services demanded at a given price level. When a factor changes, the aggregate demand curve shifts left or right.

4.3.2 Macroeconomic equilibrium
Macroeconomic equilibrium is determined when a country's data indicates that its GDP is equal to its aggregate expenditures and when its savings is equal to its investments. Adjustments toward equilibrium occur when a country's consumption equals its investments and its savings equals its investments. Consequently, the country has zero unplanned changes in inventory and its GDP equals its aggregate expenditure.

Macroeconomic equilibrium may or may not reflect attainment of the three basic macroeconomic goals. A gap is likely to exist between the actual GDP and the full employment or potential GDP, which can mean that employment can be too low or too high. The former refers to unemployment, and the latter refers to inflation; both are undesirable and often lead to instability arising from actions that attempt to address the gap.