Question

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

Short answer

The aggregate demand curve slopes downward because monetary authorities will raise the real interest rate to keep inflation in check as inflation rises.

The short-run aggregate supply curve slopes higher because inflation rises when production rises relative to output,

Step-by-step solution

Step 1. Define aggregate demand and aggregate supply.

The total quantity of demand for all finished products and services generated in an economy is measured as aggregate demand.

Aggregate supply, often known as total production, is the whole supply of goods and services produced within an economy in a given period at a specific overall price.

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

The aggregate demand curve slopes downward because monetary authorities will raise the real interest rate to keep inflation in check as inflation rises. This increase in real interest rates discourages spending and encourages savings, resulting in decreased production at higher inflation levels. Because inflation rises when production rises relative to output, the short-run aggregate supply curve slopes higher.