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
using a graph of the classical labour market, illustrate the effects of a real wage existing in the market that is lower than the equilibruim real wage.what will eventually happen

During the year, Calabash Clinic made a $50,000 cash payment toward its bank loan which it had previously recorded; $40,000 was for principal, and $10,000 was to pay the full amoun

Q. Show the AD curve over time? With inflation, AD curve will no longer be stable over time. In its place, it will glide upwards or downwards at a rate determined by growth rat

The Government, Rest of the World and the financial markets total expenditure of government can be divided into two parts: transfers to private sector and consumption.

does central bank determine money supply in the economy

The final and most important part of the methodology is the impulse response functions which will provide the most information with regards to the aim of the project. In order to a

What is Consumer Price Index CPI is a price index of a specific basket known as the CPI-basket. CPI-basket contains essentially all the service and goods consumed in a country

Relationship between the interest rate and the bond price Note that the higher the issue price, the lower the interest rate. Similarly when the price of a government bond incr

Tariffs and Non-tariff Barriers A significant aspect of the trade reforms of the 1990s was the reduction in the then prevailing very high import duties (over 300 percent in so