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

Supply and demand , construct the supply and demand curves for rental housi...

construct the supply and demand curves for rental housing, indicating equilibrium rent and quantity. Show the effects on this market( i.e., on supply, demand, equilibrium rent and

Accounting system-example iii, ACCOUNTING SYSTEM-EXAMPLE III  Now suppo...

ACCOUNTING SYSTEM-EXAMPLE III  Now suppose the Jam Co. manufactures some herbal chemicals and flavors which it sells partly to Extracts Co., partly to Bottling Co., some are co

Analyse data using anova, A scientist postulates that grazing by gastropod ...

A scientist postulates that grazing by gastropod snails affects the settlement of Spirorbid worms in estuaries. She sets up a manipulative experiment to test this by using cages to

Effects of fiscal policy, (Effects of Fiscal Policy) Recently some legislat...

(Effects of Fiscal Policy) Recently some legislators have called for tax increases to reduce the federal budget deficit. Conservatives have countered that such tax increases could

Discuss about the keynesian economists, Discuss about the Keynesian economi...

Discuss about the Keynesian economists The Keynesian economist A. W. Phillips developed short-run Phillips curve analysis in the 1950s. Phillips had researched the relationshi

What is labor market, Q. What is Labor Market? Labor market in the IS-L...

Q. What is Labor Market? Labor market in the IS-LM model is the same as in cross model. Hence the IS-LM model is only applicable if profit-maximizing quantity of L would result

#title., it has been argued that economic development of developing countri...

it has been argued that economic development of developing countries has been held back by a persistent fall in the terms of trade of developing countries over the long run

Explain the money market diagram, Q. Explain the Money market diagram? ...

Q. Explain the Money market diagram? Let's begin by studying the money market when GDP is given. When Y is given, MD will only rely (negatively) on R and we can draw a figure w

ORTHODOX KEYNESIAN, WHAT IS THE CENTRAL PROPOSITION OF THE ORTHODOX KEYNESN...

WHAT IS THE CENTRAL PROPOSITION OF THE ORTHODOX KEYNESNIANS?

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