The following diagram illustrates an increase in Aggregate Demand.  The factors that influence aggregate demand include Consumption, Investments, Government spending, and exports minus imports. Consumption is a factor because by increasing it, aggregate demand increases as well since it measures the total spending within an economy over a given time period. For Investments, the more investments that an economy has, the greater the AD. Government spending is a factor because, if the government decides to contribute more towards the community, in the forms of improved transportation and roads, more spending occurs. Finally, for exports minus imports, if an increase is seen it represents the spending of the economy towards its exporting sector. A real world example of this is during Christmas time, especially in Japan, more often than not, the Consumption component of AD increases significantly due to the season’s notion of buying presents.

This diagram, on the other hand, represents a decrease in Aggregate Demand. The decrease can be brought upon by shifts in the components stated before. If there is a reduction in consumption, or a decrease in consumer spending, aggregate demand falls because there is less spending in the economy. As for Investments, if the economy receives less foreign investors, and less domestic individual investors, then there will be a shift in aggregate demand. If the government decides to spend less, the community suffers, as government owned facilities and locations are not taken cared of, resulting in a shift in AD. For exports minus imports, a fall in this component results in a shift in AD because the amount spent on the economy’s output has fallen.  A real world example that applies is the US, and the current state of its economy. Since the US has fallen on brutal times, Americans are more partial to saving instead of spending, foreign investors take less interest in US based companies, the government is attempting to spend in order to stimulate growth, and it imports more than it exports.

This diagram represents an increase in aggregate supply. The factors that influence this increase include reduction in indirect tax, wage costs, raw material and import costs, and more favorable weather conditions. By reducing indirect tax, aggregate supply increases because it measures the total amount of goods and services, which are supplied to consumers and producers. Less tax on the goods and services, more goods and services are produced and distributed.  By reducing wage costs, consumers will have more purchasing power and demand more of the good or service. For reducing raw materials and import costs, suppliers are able to focus more on their exports and learn to produce efficiently. For example, China is a supplier that has a large export cost and produces goods made of cheap raw materials. With favorable weather conditions, this affects suppliers who supply products that are associated with agriculture. For example, wheat farmers are able to supply more wheat if the weather is favorable for increased crop growth. Real world examples that describe an increase in Aggregate Supply is Nike outsourcing their production sector to third world countries such as China or Vietnam. By doing so, they are able to effectively reduce their raw materials cost, indirect taxes, and wage costs, depending on the laws of the foreign country.

The following diagram illustrates a decrease in Aggregate supply. The factors, which influence an increase in Aggregate supply, also apply to the decrease, just conversely. For example, instead of a reduction in indirect taxes, there will be an increase to reflect the pressure felt by suppliers. Higher taxes result in the demand for goods and services to decrease, thus the supply decreases as well. In this manner, an increase in wage costs, raw material and imports, and less favorable weather conditions influence the decrease in Aggregate supply. A real world example of this is Brazil, whose currency at the moment is experiencing an appreciation. As a result, the indirect taxes imposed upon the foreign companies has increased, as well as wage costs and raw materials.