Why gdp is determined only by aggregate demand, Macroeconomics

Assignment Help:

Q. Why GDP is determined only by aggregate demand?

Note that we haven't said anything about the aggregate supply so far. In order to justify why GDP is determined only by aggregate demand we have to explain why supply aggregate YS plays no role and why YS always would be exactly equal to YD (that is essential for the goods market to be in equilibrium).

We can explain why YS = Y* by analysing what would have happened if firms didn't supply this quantity.

1. Imagine that firms supplied and also produced a larger quantity so that Y > Y*. 

2. From the figure above, YD< Y and firms can't sell everything they produce. 

3. Unplanned stock investments will increase by Y - YD when companies are forced to put unsold products in stock. 

4. Then firms will want to lower their supply. Reduction will continue until YS = Y*.

5. If, conversely they supply and produce too little, Y < Y* and then Yd> Y. Stocks will now be decreased and firms will want to increase the supply.

Please note that Keynesian model always presumes quantity adjustment to get back to equilibrium. There are no price adjustments in the Keynesian model.


Related Discussions:- Why gdp is determined only by aggregate demand

Theand the protection of property rights, Why is private property, and thea...

Why is private property, and theand the protection of property rights , so critical to the success of the market system ? How do property rights encourage cooperation?

Concept of growth and growth rate, The Concept of Growth and Growth Rate is...

The Concept of Growth and Growth Rate is explained below: Economic growth is rise in an economy’s level of the production of commodities, output or income. We can talk about th

State major fiscal objective of chancellor george osborne, Major fiscal obj...

Major fiscal objective of Chancellor George Osborne The major fiscal objective of Chancellor George Osborne when coming to office in May 2010 was to remove the UK's structural

Is consumption depend on GDP in the cross model, Q. Is Consumption depend o...

Q. Is Consumption depend on GDP in the cross model? Aggregate demand The consumption function Consumption C(Y) depends positively on GDP in the cross

The aggregate demand curve, The aggregate demand curve shows the combinatio...

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 o

What is the meaning of deindustrialisation, What is the meaning of Deindust...

What is the meaning of Deindustrialisation Deindustrialisation or structural decline of many manufacturing industries along with activities like coal mining is associated with

What are the costs of economic growth, What are the costs of economic growt...

What are the costs of economic growth? Economic growth can result also into: • Increases within pollution noise and congestion • Unnecessary depletion of non-renewable r

In urdu, circular flow of national income?

circular flow of national income?

Fact that price and quantity, The fact that price and quantity demanded are...

The fact that price and quantity demanded are related negatively illustrates the? a. law of supply b. law of quantity supply c. law of demand d. law of quantity demande

What do you mean by price index, Q. What do you mean by Price index? Be...

Q. What do you mean by Price index? Because we are only interested in percentage change of the price level and not particular value, we can divide every price level by a given

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