Explain ad-curve at a given point in time, Macroeconomics

Assignment Help:

AD-curve, just like before, displays combinations of Y and P where both goods market and money market are in equilibrium. At any given instance, even when we have inflation, aggregate demand would as before depend negatively on P. Description, as follows is little more involved.  Let's say that price level one year ago was 100 and that P is price level today. Then p = (P - 100)/100 is rate of inflation during the previous year and P = (1 + p).100 today. For illustration if p is 10%, we have P = (1 + 0.1) .100 = 110 today. Given that price level in the previous year, we have a positive relationship between P and p.

Given price level last year, there is a price level today that would make inflation exactly same as the growth rate in money supply over the last year. For instance, say that pM was 4% in previous year and P was 100 a year ago then if P = 104 today we have p = pM, IS- and LM-curves are stable and we can find level of GDP that gives the equilibrium in both markets by finding the point where they intersect. 

Now, to display that AD curve slopes downwards, we should demonstrate that if P > 104, a lower level of GDP will lead to simultaneous equilibrium. To see this, just note that for P > 104, inflation has been a little higher and LM curve will be a little higher up resulting in a lower level of GDP. A similar argument demonstrates that GDP should be higher if P < 104 for both markets to remain in equilibrium.

So at a given point in time, given the price level last year, aggregate demand would still rely negatively on P and the AD curve will slope downwards.


Related Discussions:- Explain ad-curve at a given point in time

Draw a typical frap curve and explain its different regions, 1. Describe th...

1. Describe the process of diffusion in cells (not more than 2 pages). 2. Derive the equation for Fick's second law. 3. Draw a typical FRAP curve and explain its different re

Explaining balance of payments, Explaining balance of payments: First,...

Explaining balance of payments: First, with the second oil shock of  1979-80 and  doubling of  India's  import bill along with  dismal  export performance as result of severe

Social entrepreneur is relying on contributions, If a social entrepreneur i...

If a social entrepreneur is relying on contributions, are there not risks in being accountable and using that money wisely?

Define the term- wages and income, Define the term- Wages and income R...

Define the term- Wages and income Remember that by wage we mainly mean what you receive for working one hour, whereas income is the total revenue from all sources over a longe

Long run imports will most likely be paid, In the long run, imports will mo...

In the long run, imports will most likely be paid for with: a. Aexports. b. The sale of real and financial assets. c. the extension of credit. d. higher domestic unempl

Nominal interest rate and expected inflation, Q. Nominal interest rate and ...

Q. Nominal interest rate and expected inflation? When we have inflation, we can't, of course, presume that expected inflation is zero. So real interest rate will no longer be e

Economics, what is a limitation of nation income

what is a limitation of nation income

Price elasticity of demand, Suppose that quantity demand falls by 30% as a ...

Suppose that quantity demand falls by 30% as a result of a 5% increase in price. What would be the price elasticity of demand for this good?

Enumerate the categories of firms in the circular flow, Firms in the circul...

Firms in the circular flow We divide all firms into 3 categories: F R comprises all firms which acquire raw material (farm products, iron ore and so on), F H all those that 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