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

Reciprocal demand, what are the factors effecting reciprocal demand?

what are the factors effecting reciprocal demand?

Derive the engel curve for shortbread cookies, Jen spends all her income on...

Jen spends all her income on shortbread cookies (S) and cupcakes (C). Her utility function is given by: U(S,C) = S +2C. Suppose that Jen has an income of $10 and that a cupcake cos

Country abandons its national currency, When a country abandons its nationa...

When a country abandons its national currency and adopts the currency of the United States, this is known as: A) A floating exchange rate system. B) Dollarization. C) A speculat

Discretionary Fiscal Policy Effectiveness, Discretionary fiscal policy will...

Discretionary fiscal policy will stabilize the economy most when: A.) deficits are incurred during recessions and surpluses during inflations B.) the budget is balanced each year C

Explain different levels of a hypothetic, Suppose that a public park is vis...

Suppose that a public park is visited by people living in five concentric zones around the park. Each zone has a population of 5000, and the total travel cost for a visit to the pa

Impact of minimum wage law, Minimum wage laws are common in many countries....

Minimum wage laws are common in many countries. The debate over minimum wage includes claims about the impact of this action on employment levels and wage levels. What impact does

Neo-classical thinking on growth, Neo-classical thinking on growth: Neo...

Neo-classical thinking on growth: Neo-classical  thinking  on  growth  is  owed  to  the Robert  Solow  whose  exogenous  growth models in the of the mid-20th century remained

Analyse Inflation, 1. how long will take to deliver a 3000-word assignmen. ...

1. how long will take to deliver a 3000-word assignmen. Must include reliable references.deadline 2nd sept 2. How much do you guys charge? Can I avail the 50% offer?Minimum 100 wo

Difference between productive and allocative efficiency, Explain the differ...

Explain the difference between productive and allocative ( economic ) efficiency. Explanation of productive efficiency, e.g. output at AC minimum Define to the effect th

What are the gains from trade, Shows the productivity for the countries Pin...

Shows the productivity for the countries Pin and Pang. Machines Bread Pin     4 or 3 Pang 3 or 8 1) If the working population of Pin and Pang are both 6 million, divide

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