The aggregate demand curve, Macroeconomics

Assignment Help:

The aggregate demand curve shows the combinations of the price level and the level of output at which the goods and money markets are simultaneously in equilibrium. Let us now go on to the derivation of the aggregate demand.

Figure 

267_aggregate demand curve.png

In the figure  the aggregate demand curve is derived from the IS-LM framework. Suppose the given price level is Pand the nominal stock of money is  944_Asset market and LM curve.png . The real stock of money is then  768_aggregate demand curve1.png   and the LM curve corresponding to this stock of real money is shown in the top panel of figure 6.1.

The IS curve is also shown.

The economy is at the equilibrium point E. The output is Y0 and the interest rate is i0. Thus when the price level is P0, the goods and the money markets are in equilibrium at an income level of Y0.

The point E in the lower panel of figure 6.1 shows the income and price combination (Y0, P0).

Now, if the price level falls from P0 to Pl, the real stock of money in the economy increases to  852_aggregate demand curve2.png   (for the same nominal stock of money  944_Asset market and LM curve.png ). This increase in the real stock of money shifts the LM curve downwards to LMl  852_aggregate demand curve2.png  . The new equilibrium is at the point El. At El, the income is higher at Yl and the interest rate is lower at il. Thus when the price level is Pl, the goods and the money market are in equilibrium at an income level of Yl. We see that when the price level falls from P0 to Pl, the income level rises from Y0 to Yl. The converse happens when the price level rises. Thus we get a downward sloping aggregate demand curve.


Related Discussions:- The aggregate demand curve

Aggregate demand and aggregate supply, Find one or more articles in the wal...

Find one or more articles in the wall street Journal or other business publications that describe changes in fiscal or monetary policies in the United States. Discuss how these pol

Passive deficit is the portion, A passive deficit is the portion of the def...

A passive deficit is the portion of the deficit that exists when: A. inflation is not fully anticipated. B. inflation is fully anticipated. C. the economy is at potential income. D

Statutory compliance mandates, To the extent that statutory compliance mand...

To the extent that statutory compliance mandates conditions that formerly were only available to workers who had union negotiating power to win such conditions at the bargaining ta

DEFLATION IN JAPAN, what happened to the equilibrium price level in Japan d...

what happened to the equilibrium price level in Japan during the early 2000s? How did Japan''s equilibrium price level adjust between the middle of 2008 and early 2010?

Propensity, different determinants of propensity to consume

different determinants of propensity to consume

Effect on unemployment, From the lower left graph of Fig. it can be seen th...

From the lower left graph of Fig. it can be seen that there is a time lag associated with an oil price shock and its subsequent effect on unemployment. The results show that for th

Joke among economists, There is a joke among economists that children are a...

There is a joke among economists that children are an "inferior good." In many countries there appears to be a negative relationship between income and the number children in a hou

Find supply curve-perfect competition and entry decisions, ChoppinAxe is a ...

ChoppinAxe is a small Swedish firm that produces wood planks and operates in a perfectly competitive market. Every firm in the market has the following total cost function: C(qi

Monetization of public debt, What are the pros and cons of monetization of ...

What are the pros and cons of monetization of public debt

Perfectly competitive retail market, Why a perfectly competitive retail mar...

Why a perfectly competitive retail market is more competitive than a monopoly

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