Question

Explain why the aggregate demand curve slopes downward and the short-run aggregate supply curve slopes upward.

Short answer

Because monetary authorities will raise the real interest rate to keep inflation in check as inflation rises, its aggregate demand curve falls downward.

Because inflation goes up when output rises compared to output, the short-run supply curve slopes higher.

Step-by-step solution

Step 1. Define aggregate demand and aggregate supply.

Aggregate demand is defined as the total amount of demand generated in economy for all finished goods and services.

Aggregate supply, often defined as the total output, is the whole quantity of services that are produced within an industry within a certain time period at a given overall price.

Step 2. Why the aggregate demand curve slopes downward while the aggregate supply curve slopes upward in the near run?

Because financial institutions will increase the rate of interest to keep inflation under control as inflation rises, the curve of aggregate supply slopes downward. This rise in interests rates discourages spending and encourages saving, resulting in lower output at higher inflation prices. Because inflation increases when output rises compared to production, the relatively brief supply curve slopes upward.