Evaluate an increase in aggregate demand.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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An increase in aggregate demand (AD) can be completely good, completely bad, or somewhere in between.  This depends on where the economy is in terms of the aggregate supply (AS) curve.

If the economy is in the Keynesian range of the AS curve, an increase in AD is completely good.  The AS curve is flat there so an increase in AD increases real Gross Domestic Product (GDP) without causing an increase in the price level (inflation).  

If the economy is in the classical range of the AS curve, an increase in AD is completely bad.  The AS curve there is vertical so an increase in AD causes an increase in the price level without any increase in GDP.

If the economy is in the intermediate range of the AS curve, an increase in AD is partly good and partly bad.  The AS curve slopes upward here, so an increase in AD will cause both an increase in GDP and an increase in the price level.

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