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
Assume the United States has the following consumption information:                                     GDP = Income              Consumption

Trade and Economic Growth: For a long time, academic debate on trade liberalization and its positive effects on growth rate remained inconclusive and unsettled. But most recen

It's been three weeks since you started working for BioMed and there's still no trace of Selwyn. That means you're still BioMed's resident economic expert. Harry the CEO was ple

what is credit multiplir and how does it work

when domestic currency becomes more valuable in terms of foreign currency, the domestic currency is said to have

A significant argument for the augmentation has to do with concept of money illusion. Money illusion means that you care about nominal rather than real amounts. Imagine that your s

Given the following: Airbus Boeing Demand P = 182.868 - 0.0003Q P = 198.6592 - 0.00013Q TVC Curve TVC = 104.8822Q - 0.001Q^2 + 0.09Q^3 TVC = 25.8678Q - 0.00023Q^2 + 0.4Q^3 In

The primary functions of economists are to teach, contribute research and empirical findings and formulate policies. Most of the professional economists are associated with academi

What was the total public debt outstanding on the same day in 2000? What was it in 2008?

What are the important tools to consider Monetary Policy? Important tools to consider Monetary Policy: a. What the money demand curve is b. Why the liquidity preference m