The aggregate supply is cumulative of the goods an economy can produce and sell. It is also referred as the real GDP. The aggregate supply is represented using an aggregate supply curve. The curve is upward sloping in the short run. The aggregate demand is the cumulative domestic goods and services in an economy. The aggregate demand is represented by an aggregate demand curve that is downward sloping (Reifschneider, Wascher, & Wilcox, 2015).
The changes in the business cycle may result in a boom or a recession. A recession is caused by a fall in the aggregate demand. The fall in demand is occasioned by several factors: rise in interest rates causes capital goods to be expensive shifting the aggregate demand curve towards the left; when real household wealth decreases the aggregate demand curve decreases. Other factors include weak currency, decreasing inflation expectation, decreases in the income of foreigners, and changes in expectations about the future.
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An economic boom is caused by an expanding economy characterized by high employment rates, rise in property prices, and enhanced household wealth. The aggregate supply curve expands as the economy’s production capacity increases. Improved technology, net investment, and positive institutional changes that favor high productivity surge the short-run and long-run aggregate supply. For example, institutional changes such as the provision of public goods at low cost improve the economy. Under such circumstances, the banks are willing to lend, equity withdrawal increases and saving ratio decreases; subsequently, it causes an increase in consumption spending and improves economic growth.
Reference
Reifschneider, D., Wascher, W., & Wilcox, D. (2015). Aggregate supply in the United States: recent developments and implications for the conduct of monetary policy. IMF Economic Review , 63 (1), 71-109.
