Introduction

It is an established principle in macroeconomics that the aggregate demand and the aggregate supply together determine the level of aggregate output of goods and services, aggregate
employment and the general price level in an economy. Therefore, as the first step, the meaning of the concepts of aggregate demand and aggregate supply are explained below.

Aggregate Demand

Aggregate demand is the total demand for goods and services in the economy. The aggregate demand is usually related to the price level. An inverse relationship could be assumed between these two variables. That is, the greater the price level the lower the aggregate
demand and vice versa.

Aggregate Supply

Aggregate supply is the total supply of goods and services in the economy. In respect of aggregate supply there is no such clear-cut relationship with the price level. In macroeconomics we have two different kinds of aggregate supply concepts based on two different sets of assumptions. They are: (a) the Classical concept of aggregate supply, and (b) the Keynesian concept of aggregate supply. We shall take up these two concepts one
by one.

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Determination of income and employment.pdf