Ad curve is the aggregate demand, Macroeconomics

Assignment Help:

The AD curve is the aggregate demand

The AD curve is the aggregate demand as a function of P whenthe goods and money market are both in equilibrium

AD curve demonstrates not only the equilibrium combinations of P and Y - it also demonstrates the aggregated demand as a function of P when both markets are in equilibrium. This follows from equilibrium condition in the goods market that requires aggregate demand to be equal to GDP. When we change P, AD curve will tell us the response of Y and thus also the response of YD. You may hence use the AD curve to find the aggregate demand for different prices under the condition that both markets are in equilibrium. 

Primarily, this may seem like a contradiction. We claimed that only endogenous variables that affect aggregate demand where Y andR. Particularly we stated that P doesn't affect YD as long as we kept R and Y fixed.

  • If we start in equilibrium and change P however keep R and Y constant, YDwon't change though we will no longer be in equilibrium in money market.
  • If we require both markets to be in equilibrium, R and Y should change when P changes.
  • Specifically, R should fall and Y should increase when P decreases if both markets are to be in equilibrium.
  • As YDrelies positively on Y and negatively on R, YD will then increase.
  • So YD increases when P falls when both markets remain in equilibrium and there is no contradiction.

Related Discussions:- Ad curve is the aggregate demand

Elucidate elasticity of supply using the midpoint formula, An attorney supp...

An attorney supplies 40 hours of work per week when her fee is $100 per hour but supplies 60 hours of work per week when her fee rises to $120 per hour. Using the midpoint formula,

Recommendation reduces cost, In "Kitchen Nightmares", Chef Gordon Ramsa vis...

In "Kitchen Nightmares", Chef Gordon Ramsa visits struggling restaurants and gives the owners of the restaurant a number of recommendations intended to reverse the restaurant's pro

Money supply.., term paper on determinat and multiplier of money supply

term paper on determinat and multiplier of money supply

Payment toward its bank loan, During the year, Calabash Clinic made a $50,0...

During the year, Calabash Clinic made a $50,000 cash payment toward its bank loan which it had previously recorded; $40,000 was for principal, and $10,000 was to pay the full amoun

Imperfect-information model, According to the imperfect-information model, ...

According to the imperfect-information model, when the price level is greater than the expected price level, output will _____ the natural level of output A) be greater than

Substitution and income effects in units, Individual A has UA(XA,YA)=lnXA+2...

Individual A has UA(XA,YA)=lnXA+2YA and has $500. PX=5 and PY =10. (a) Find the optimum. Show that it is indeed the maximum. (b) PX=10. Find the new optimum. (c) Calculate

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

Lewis model, what is the relevance of the lewis model

what is the relevance of the lewis model

Keynes liquidity Preference theory stipulates that m, #questionKeynes liqui...

#questionKeynes liquidity Preference theory stipulates that money demand is negatively related to current income and positively related to interest rate..

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