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

Economic system: protectionism and free trade, why is international trade i...

why is international trade important for South Africa?

Define the natural rate of unemployment, Define the Natural rate of unemplo...

Define the Natural rate of unemployment Natural rate of unemployment is defined as the sum of rates of structural, frictional, and classical unemployment (excluding cyclical un

Trade cycle, policy measures to control trade cycle

policy measures to control trade cycle

Slope of the aggregate expenditure curve, Consider an economy with the foll...

Consider an economy with the following characteristics: i. The price-level is fixed ii. The economy is closed (Exports - Imports = 0) iii. Government spending (G) and Inve

Intermediate macroeconomics, An economy's IS and LM curves are given by the...

An economy's IS and LM curves are given by the following equations: with Y indicating output (income), c indicating the marginal propensity to consume, I investment, G gove

Explain initial actual markup, George has been selling 5,000 T-shirts per m...

George has been selling 5,000 T-shirts per month for $8.50. When he increased the price to $9.50 he sold only 4,000 T-shirts. What is the demand elasticity? If his marginal cost is

Newton''s donuts has been estimated, The demand function for Newton's Donut...

The demand function for Newton's Donuts has been estimated as follows: Qx = -14 - 54Px + 45Py + 0.62Ax where Qx represents thousands of donuts; Px is the price per donut; Py

What is cost-push inflation, What is Cost-push inflation Cost-push infl...

What is Cost-push inflation Cost-push inflation takes place when costs of production increase causing short-run aggregate supply curve to shift to left. The main causes of c

Assignment #1, Explain the meaning of a production possibilities curve

Explain the meaning of a production possibilities curve

Factors you would examine in your research, Identify a generic organization...

Identify a generic organization (e.g., manufacturing plant, hospital, educational institution). You will use this same organization in your Final Project. Assume that you are part

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