From microeconomics we know that firms have supply curves for goods and services. But what happens when we try to get a picture of the supply of goods and services for the entire economy? While this task may at first seem daunting, there is a relatively simple way to perform it by using the aggregate supply curve. The aggregate supply curve represents the total supply of goods and services in an economy. By defining the aggregate supply curve in terms of the price level and output or income, we can analyze the effects of other variables, such as the interest rate, on aggregate supply.
This second part of this SparkNote will contain a discussion of modeling the macroeconomy. In previous macro SparkNotes, we learned about macroeconomic phenomena like fiscal policy, monetary policy, and unemployment, to name a few. We also saw how these phenomena affect the money market, output, and interest rates. The next step is to evaluate the effects of phenomena on the entire macroeconomic picture.
Aggregate supply and aggregate demand model the effects of economic changes on the economy as a whole. By utilizing the information we'll learn about the aggregate supply curve and about the aggregate demand curve, we can determine the effects of economic policies on the macroeconomy.