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

Macroeconomics , 1. Nations trade what they produce in excess of their own ...

1. Nations trade what they produce in excess of their own consumption to: A) generate jobs for the domestic economy. B) earn “good will” from the World Bank. C) prevent chronic sur

Country club bills, Suppose the country club bills based on a sample of 4 m...

Suppose the country club bills based on a sample of 4 members are: 358, 958, 665, 846. What is the standard deviation for this sample of bills? (please round your answer to 1 decim

HELP, Suppose the US and Mexico both produce semiconductors and auto parts ...

Suppose the US and Mexico both produce semiconductors and auto parts and the US has a comparative advantage in semiconductors while Mexico has a comparative advantage in auto parts

Law of diminishing returns, Explain the law of diminishing marginal returns...

Explain the law of diminishing marginal returns using the example of a factory which is currently running at half capacity and employs more staff

Describes the metzler paradox, Which of the following statements BEST descr...

Which of the following statements BEST describes the Metzler paradox? a. Tariffs improve the imposing nation's terms of trade. b. Export subsidies hinder the imposing nation's term

What are the advantages of capitalism, The benefits of capitalism are that ...

The benefits of capitalism are that the governments have limited control over other business, which lets business compete.

Illustrates about the terms of elasticity, Illustrates about the terms of e...

Illustrates about the terms of elasticity? • Definition of elasticity a. Price elasticity of demand b. Income elasticity of demand and c. Price elasticity of supply

Two countries had the same levelof real gdp per capita, If Country A had fo...

If Country A had four times the initial level of real GDP per capita of Country B and it was growing at 1.4 percent a year, while real GDP was growing at 2.3 percent in Country B,

Insurance firm processes claims, Your Insurance firm processes claims throu...

Your Insurance firm processes claims through its newer, larger high tech facility and its older, smaller low-tech facility. Each month, the high-tech facility handles 10,000 claims

Supply-side economics market freedom, What is Supply-side Economics Market ...

What is Supply-side Economics Market Freedom? Markets must be allowed to work more freely and steps taken to improve this efficiency by:   freeing them from governm

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