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

LM-curve in the AS-AD model, The LM-curve in the AS-AD model  ...

The LM-curve in the AS-AD model  The LM-curve will shift upwards (downward) when P is increases (decreases) in the AS-AD model is moved L

Engine performance in general are not adversely affected, Henry Ford's Mode...

Henry Ford's Model T was originally designed and built to be run on ethanol. Today, ethanol (190-proof alcohol) can be produced with domestic stills for about $0.75 per gallon. Whe

Market demand and market supply for fish, Consider a market for fish whose ...

Consider a market for fish whose market demand and market supply for fish is specified as Qd = 300 - 2.5 P and Qs = - 20 + 1.5 P respectively. The equilibrium price and quantity is

For you and other mexican farme, For you and other Mexican farmer-ranchers ...

For you and other Mexican farmer-ranchers rice is a substitute good for corn as basic food stuff for human consumption. If the market price for feed corn and rice were the same bef

Regional trading arrangements, Regional Trading Arrangements: You have...

Regional Trading Arrangements: You have seen in earlier Units that India has been playing an active role in WTO discussions. While Hong Kong WTO Ministerial has saved and kept

Consumer confidence, Use a diagram of the open economy model (e.g. fig 32.4...

Use a diagram of the open economy model (e.g. fig 32.4 from the text) to illustrate and explain the effect of the following event on the market for loanable funds, the level of net

Describe the working of commercial banks, Q. Describe the working of Commer...

Q. Describe the working of Commercial banks? Fact that currency inside commercial banks isn't money may strike you as odd though it is an important principle. 100 dollar bill i

What are the four different measures of gdp, What are the Four different me...

What are the Four different measures of GDP Using circular flow model we see that there are 4 equivalent techniques of measuring GDP: Using the definition: market value

Demographics of the customers, A firm conducted a research about the demogr...

A firm conducted a research about the demographics of their customers. For the study they collected data about the following variables: gender, marital status, credit rating (low,

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