 Now we're talking about aggregate demand and aggregate supply. Remember that when prices fall aggregate demand goes up. Demand for GDP goes up because when prices fall households and others wealth goes up and they want to spend more money. Now what happens in this graph if the government wants to go in and spend more on aircraft carriers bombs schools and so forth. Well in that case at any given price level demand shifts out. So when government expenditure goes up we'll have a shift outward in the aggregate demand line. So at any price level then say P0 then demand for output will go up from GDP 0 to GDP 1 and and the economy will expand. Now to complete this model we have to put in aggregate supply. Now if you took microeconomics you probably already know what we're going to draw in here. We're going to draw a line that looks like that. Aggregate demand slopes downward. Aggregate supply slopes upward. Now why does the aggregate supply curve slope upward? It slopes upward because when prices go up firms can make more profit by producing more output as long as their costs don't go up quite as fast. So if the price of the product they sell goes up faster then the costs of what it takes to produce these goods goes up then they can make more profit by producing more and they're going to want to produce more. And right here where the two lines cross aggregate supply will equal aggregate demand and output will be determined at GDP 0. That's a nice nifty model. Now let's see what happens under certain scenarios. First of all we've already talked about what will happen if the government spends more money. Let's do that again now that we've put in aggregate supply. So let's say the government spends more money in order to get the economy out of a recession. So the government expenditure goes up the aggregate demand curve shifts out. Where will the new equilibrium be? Let's say we started off here the new equilibrium will be here at point B. At point B output will be higher, but prices will also go up. Now is there any limit to this? Can the government just keep spending more money and generate more output? And the answer is no. At a certain point we have a limit. Full employment when all of the labor and all of the resources in the economy are being used then any further increases in spending won't generate more output because we're using all the resources that are available and that will be the maximum employment the economy can produce. Voila.