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An economy is in equilibrium when the aggregate supply is equal to the aggregate demand. How consumer behaviour changes ultimately results in a change in either the supply or demand for goods and services within an economy, and it is this change that defines how employment and inflation rates are affected.
In any economic model, where wages are completely flexible and the economy is at full employment, a rise in aggregate demand will lead to a rise in output and in equilibrium prices (due to consumer competition).
However, the above theory will only prove beneficial to the economy if output remains able to comply with levels of demand. Therefore, if there is an increase in aggregate demand, then aggregate supply will have to increase to maintain monetary balance.
Therefore, if the aggregate demand curve (AD1) shifts continually (AD) and then (AD) through the graphical stage of unused capacity, then increased output isn't necessary at that time. This is shown by the constant harmony on the perfectly elastic aggregate supply curve (AS1) gradient. So the factors of production of firms involved in supply can produce more than they are doing at the same price level e.g. there is no need to increase worker's wages. So at this stage, both employment and inflation rates are unaffected.
When the aggregate demand curve reaches the intermediate range on the Keynesian aggregate supply curve, firms can still produce more but at a cost. This cost is illustrated by an upward slope on the AS curve. As the economy nears perfect inelasticity, it becomes more difficult for businesses to attract scarce resources. At different points on this upslope, the economy will experience temporary increases in both employment and the rate of inflation. At point 'x' on the aggregate supply curve, the economy is undergoing a temporary increase in rates of inflation as suppliers are adjusting to changes in demand, and are therefore don't produce enough to satisfy consumers. At point 'y' on the intermediate range, suppliers have overcome the temporary shortage of goods and services provided by employing more labour.
If, for whatever reason, high street spending increases even further, then the supplier's level of output will reach full capacity. At this level, no more goods and services can be produced in the short run, regardless of price change. At full employment, all the firm's factors of production are being utilised and so supply is totally inelastic. There is no way of changing employing more labour as it wouldn't prove economically beneficially to the firm (unless there was a huge injection of wealth). This is the stage at which inflation is most threatening. If you cannot produce the goods and services to comply with demand, then the price of market goods will steadily increase. This is displayed by the changing position of AD4, 5 and 6. The higher the demand curve goes, the higher the price level of the constant quantity of output becomes.
With reference to this particular question, we must remember that the changes in aggregate demand represent the consumer behaviour that is constantly increasing due to any of the factors mentioned in part a).
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