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

Process to control inflation rate, Process to control inflation rate Th...

Process to control inflation rate The belief that control of inflation must be the primary economic objective of government can be traced back to neo-liberal revolution that st

Economic performance, This 24 year 1 quarter period should offer sufficient...

This 24 year 1 quarter period should offer sufficient insight into the short term and long term correlation between the variables. Figure - A graph showing the trend of

Cumulative external cost of production, A textile mill releases pollution i...

A textile mill releases pollution into nearby wetlands, and the associated health and ecological damages are not considered in the private market. Suppose you observe the following

Explain what happen to supply of good, Good X is produced in a competitive ...

Good X is produced in a competitive market using input A. Explain what would happen to the supply of good X in each of the following situations. The price of input A decreases.

Calculate the demand and probability, Sally's Silk Screning produces specia...

Sally's Silk Screning produces specialty T-shirts that are primarily sold at special events. She is trying to decide how many to produce for an upcoming event. During the event its

Describe a hypothetical ideal, Design a hypothetical ideal randomized contr...

Design a hypothetical ideal randomized controlled experiment to study the effects on highway traffic deaths of wearing seat belts. Suggest some impediments to implementing this exp

What do you understand production method, Question 1 Discuss the relation...

Question 1 Discuss the relationship between microeconomics and macroeconomics Question 2 What do you understand production method? What precaution should be taken while

Determine the profit-maximizing average, It's been three weeks since you st...

It's been three weeks since you started working for BioMed and there's still no trace of Selwyn. That means you're still BioMed's resident economic expert. Harry the CEO was ple

Determinants of money supply, Determinants of Money Supply The precedi...

Determinants of Money Supply The preceding sections concentrate on the processes through which the commercial banking system creates and destroys deposits by purchasing and se

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