ABSTRACT
This chapter examines how changes in consumption, investment, and government spending might affect the levels of aggregate demand in the economy. It shows how aggregate supply is related to the rate of inflation. It will be easiest to explain the shape of the curve starting from the right, at high output levels. When people have experienced inflation, they come to expect it. They then tend to build the level of inflation that they expect into the various contracts into which they enter. When people start to observe wage and price inflation tapering off in some sectors of the economy, they may change their expectations about inflation. The AS curve also shifts when the capacity of the economy changes. A supply shock is something that changes the ability of an economy to produce goods and services.
