Ad curve is the aggregate demand, Macroeconomics

Assignment Help:

The AD curve is the aggregate demand

The AD curve is the aggregate demand as a function of P whenthe goods and money market are both in equilibrium

AD curve demonstrates not only the equilibrium combinations of P and Y - it also demonstrates the aggregated demand as a function of P when both markets are in equilibrium. This follows from equilibrium condition in the goods market that requires aggregate demand to be equal to GDP. When we change P, AD curve will tell us the response of Y and thus also the response of YD. You may hence use the AD curve to find the aggregate demand for different prices under the condition that both markets are in equilibrium. 

Primarily, this may seem like a contradiction. We claimed that only endogenous variables that affect aggregate demand where Y andR. Particularly we stated that P doesn't affect YD as long as we kept R and Y fixed.

  • If we start in equilibrium and change P however keep R and Y constant, YDwon't change though we will no longer be in equilibrium in money market.
  • If we require both markets to be in equilibrium, R and Y should change when P changes.
  • Specifically, R should fall and Y should increase when P decreases if both markets are to be in equilibrium.
  • As YDrelies positively on Y and negatively on R, YD will then increase.
  • So YD increases when P falls when both markets remain in equilibrium and there is no contradiction.

Related Discussions:- Ad curve is the aggregate demand

Medium run adjustment - economy adjustment, Suppose the economy is currentl...

Suppose the economy is currently in recession, and the exchange rate if fixed using the IS-LM model. a) Explain and illustrate the economy adjustment (in the medium run) b) E

Monetary Economics, What is the difference between money multiplier and cre...

What is the difference between money multiplier and credit multiplier

Determine the output level-wholesale price, Assume an industry with one ups...

Assume an industry with one upstream and one downstream monopoly. The upstream monopoly produces Q , which is sold solely to the downstream monopoly. The downstream monopoly faces

Money market in the AS-AD model, Q. Money market in the AS-AD model? g...

Q. Money market in the AS-AD model? goods and the money market in the AS-AD model We begin by studying goods market and money market when prices are no longer constant. Fi

Short-run framework, What is the difference between the short-run framework...

What is the difference between the short-run framework and the long-run framework? Discuss how each relates to supply and demand.

Draw game in two standard forms, Consider the following game [payoffs are i...

Consider the following game [payoffs are in the form: (Ann, Bob, Carol)]: a) List each player's actions and strategies. b) If Ann "buys" Carol's position in the game (i.

Stock of a particular company, Suppose that you have bought a total of 3100...

Suppose that you have bought a total of 3100 shares of stock of a particular company. You bought 1200 shares of stock at $17 per share, 900 shares of stock at $11 per share, and th

Grocery store buys milk, Suppose that a grocery store buys milk for $2.10 a...

Suppose that a grocery store buys milk for $2.10 and sells it for $2.60. If the milk gets old then the grocery store can sell their unsold milk back to their wholesaler for $0.60 (

Describe about price level and time, Q. Describe about Price level and time...

Q. Describe about Price level and time? We are hardly interested in the value of price level at a certain point in time. What we are interested in is percentage change in the p

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd