1 Describe how equilibrium occurs using the aggregate supply (AS) and aggregate demand (AD) framework Use this framework to explain why real GDP fluctuates around potential GDP with specific reference to the current state of the UK economy

Aggregate demand curve represents the desired spending, consumer behaviour and the buying of equipment by governments and foreigners. The aggregate demand rises with the increase in expenditure caused by increased optimism by the households on lifetime incomes and increased need for the product. The combined monetary assets and the decrease in interest rates stimulate the desire to spend by the firms and households. Low interest rates reduce the saving reward and borrowing costs for households, but for businesses, this reduces the borrowing costs for investing in equipment and plant (James, Walte and James 2006, p. 777-790).
The aggregate demand curve slopes downwards due to the fixed nominal value for some assets, particularly the money itself. The increase in prices for the goods with no changes in money leads to the real value of money balances declining and this result to decreased liquidity. The rise in prices increases the demand for dollars in financing the transactions. Short liquidity to the monetary assets results when nominal dollars’ supply does not change.
Horizontal axis in the aggregate demand curve represents total economic output, and the vertical axis represents price measures. Aggregate demand curve indicate relationship between price level and the output. Prices and output are inversely related.
Aggregate demand curve changes due to wealth effects like the money supply, interest rate effects, and the net exports effects. The changes are represented by shifts in aggregate demand curves either to the right, or to the left. A right shift in aggregate demand curve (AD1 to AD2) indicates an increase in GDP at the same price level for the quantity demanded. A left shift (AD1 to AD3) indicates a decreased GDP for the quantity demanded at the same price levels (Justiniano &amp. Claudio 2011, p. 89).