The section expands on our knowledge to cover the business cycle. Aggregate demand and supply are introduced to help explain business cycles. When we combine all markets for individual goods and services, we look at the aggregate for the entire economy. Aggregate demand is the sum of total economy-wide demand for goods and services. Aggregate demand is equivalent to GDP , or the sum of all consumption, investment, government spending and net exports in the economy.
Aggregate supply is the supply side of the economy .
It represents the productive capacity available in the economy to produce goods and services. Aggregate supply is represented by the country's production possibilities frontier. Changes in GDP will shift the aggregate demand curve, and an expansion of the PPF will result in an outward shift of the aggregate supply curve. In this section we will cover a business cycle. Business cycles are represented in this section by a change in aggregate demand.