Determination of price level, Macroeconomics

P and Y are both endogenous variables and according to the quantity theory of money we need P.Y = constant. If we divide both sides by P we get Y = constant / P. Because Y = YD in the classical model, we can write YD = constant / P. This relationship is sometimes known as 'classical aggregate demand' as it relates real aggregate demand for services and goods YD to the price level P. 

1868_Determination of price level.png

Figure: Determination of price level.

Though it is significant to remember that it isn't price adjustments which make aggregate demand equal to aggregate supply in the chart above. Aggregate demand is always equal to aggregate supply by Say's Law. In the classical model, YD isn't determined by P though rather the opposite; P is determined by YD (that is equal to YS) and money supply (which is included in the constant).

Posted Date: 8/14/2013 2:17:21 AM | Location : United States







Related Discussions:- Determination of price level, Assignment Help, Ask Question on Determination of price level, Get Answer, Expert's Help, Determination of price level Discussions

Write discussion on Determination of price level
Your posts are moderated
Related Questions
What is the use of long-run average total cost curve in the producing output? The long-run average total cost curve demonstrates the relationship in between output and average t

Give example of commercial banks how they create money For example, the borrower uses the money to buy an apartment, the funds are transferred to the seller of the apartment. T

Define the points of individual choices makes and interact. A. How individuals make choices: • Scarcity • Opportunity cost • Trade-offs • Marginal analysis B. Ho

how do I calculate the chained dollar method for real gdp

Consumer Equilibrium: According to our assumption for 'x' units consumption of the commodity, gross utility obtained by the consumer is U(x).But for this, the consumer must sp

Say that the equilibrium price and quantity both rose. What would you say was the most likely cause? There was _____(increase, decrease, no change) in demand and ________(increase,

Q. Explain about Penicillic Acid? This mycotoxin has biological properties similar to patulin. It is produced by a large number of fungi, including many Penicillia as well as m

Knowing that a neoclassical, capitalist economy depends on continuous economic growth (by making its production, distribution, and consumption more efficient), what might a savvy p

Explain the meaning of a production possibilities curve

In general, economists have found that as nations' levels of per capita real Gross Domestic Product (GDP) increase, A. the rate of population growth declines. B. the rate of