ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Two axes: a vertical axis labeled “Price level” or “PL” and a horizontal axis labeled “real GDP.”

Detailed explanation-2: -The Axes: The Y axis on the AS/AD graph is the price level (or PL) for goods and services in the economy. Think of it as the GDP Deflator or the Consumer Price Index. On the X axis, is Real GDP; which means it has been adjusted for inflation.

Detailed explanation-3: -The first piece of the aggregate demand equation is Y. This represents output or income. Because Y is the total amount of goods and services purchased by consumers, businesses, and the government, taking into account foreign trade, it is necessarily the output for the economy.

Detailed explanation-4: -Why? The price level shown on the vertical axis represents prices for final goods or outputs bought in the economy-like the GDP deflator-not the price level for intermediate goods and services that are inputs to production.

Detailed explanation-5: -As the aggregate demand curve is shifted outward, the general price level increases. This increased price level causes households, or the owners of the factors of production to demand higher prices for their goods and services.