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

Equilibrium, If the marginal disutility of labor increases, the equilibrium...

If the marginal disutility of labor increases, the equilibrium real wage increases and the equilibrium quantity of labor goes up. True or false?

Business Cycle, casual factors of the traditional business cycle and its ef...

casual factors of the traditional business cycle and its effect on sectors of the economy?

Advantages of leaving resource allocation, What are the advantages of leavi...

What are the advantages of leaving resource allocation to price allocation? Ans) The 5 benefits are Neutral, Flexible, Freedom of choice, No administrative cost and lastly Dimin

Foreign trade, how can a country maintain equilibrium GDP with foreign trad...

how can a country maintain equilibrium GDP with foreign trade?

Consumption, Consider two consumers, A and B. A and B both want perfect con...

Consider two consumers, A and B. A and B both want perfect consumption smoothing (c = cf) and both have no current wealth. However, the two consumers have different income streams.

Create a gantt chart of online food store, In today's world when almost ev...

In today's world when almost everything has become easy with just a click on the mouse, even shopping for normal groceries has been revolutionized by making it online. The project

Explain the classical growth theory, Q. Explain the classical growth theory...

Q. Explain the classical growth theory? Production function won't provide us with a theory or explanation of growth. It's only a convenient tool that helps us breaking down gro

Increase in supply, Explain the adjustment to the new equilibrium price fro...

Explain the adjustment to the new equilibrium price from an increase in supply.

Budget balanced, Given a four sector economy how do you find the budget bal...

Given a four sector economy how do you find the budget balanced

Geometric gradient series, Determine the present worth of a geometric gradi...

Determine the present worth of a geometric gradient series with a cash flow of $50,000 in year 1 and increases of 6% each year through year 8. The interest rate is 10% per year.

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