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

Pdf, asiignment on ppc

asiignment on ppc

Question one hw, A small country can import a good at a world price of 10 p...

A small country can import a good at a world price of 10 per unit. The domestic supply curve of the good is S = 20 + 10P The demand curve is D = 400 – 5P In addition, each unit of

Law of demand , Why law of demand does not hold in pakistan

Why law of demand does not hold in pakistan

Unemployment, explain the phillips curve the relationship of inflation and ...

explain the phillips curve the relationship of inflation and unemployment

Analysis the net benefits of cleanup are maximized, Consider the case of c...

Consider the case of cleaning up chemical contamination at an industrial site. The marginal benefits of additional cleanup are decreasing as the amount of cleanup increases. Howeve

Wages, what is a wage? and the difference between real and nominal wages gi...

what is a wage? and the difference between real and nominal wages giving examples?

Inherited a piece of commercial real estate, Until recently you worked as a...

Until recently you worked as an accountant, earning $30,000 annually. Then you inherited a piece of commercial real estate bringing in $12,000 in rent annually. You decided to leav

interpret and explain the nmr spectrum, Treatment of Na2PdCI4 with 3-chlor...

Treatment of Na2PdCI4 with 3-chloro-2-methyl-1-propene under an atmosphere of CO yields the dimer [(11 3 - C 4 H 7 )PdClb (A). The 1H NMR spectrum of A at 298 K shows 3 signals: a

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