The aggregate demand curve, Macroeconomics

Assignment Help:

The aggregate demand curve shows the combinations of the price level and the level of output at which the goods and money markets are simultaneously in equilibrium. Let us now go on to the derivation of the aggregate demand.

Figure 

267_aggregate demand curve.png

In the figure  the aggregate demand curve is derived from the IS-LM framework. Suppose the given price level is Pand the nominal stock of money is  944_Asset market and LM curve.png . The real stock of money is then  768_aggregate demand curve1.png   and the LM curve corresponding to this stock of real money is shown in the top panel of figure 6.1.

The IS curve is also shown.

The economy is at the equilibrium point E. The output is Y0 and the interest rate is i0. Thus when the price level is P0, the goods and the money markets are in equilibrium at an income level of Y0.

The point E in the lower panel of figure 6.1 shows the income and price combination (Y0, P0).

Now, if the price level falls from P0 to Pl, the real stock of money in the economy increases to  852_aggregate demand curve2.png   (for the same nominal stock of money  944_Asset market and LM curve.png ). This increase in the real stock of money shifts the LM curve downwards to LMl  852_aggregate demand curve2.png  . The new equilibrium is at the point El. At El, the income is higher at Yl and the interest rate is lower at il. Thus when the price level is Pl, the goods and the money market are in equilibrium at an income level of Yl. We see that when the price level falls from P0 to Pl, the income level rises from Y0 to Yl. The converse happens when the price level rises. Thus we get a downward sloping aggregate demand curve.


Related Discussions:- The aggregate demand curve

Change in nominal gdp, By given scenario answer the following questions. ...

By given scenario answer the following questions. 1. What phase of the business cycle is the economy? 2. If inflation increased by 5% during the same period, what was the cha

Two replacement compressor, You need to choose between two replacement comp...

You need to choose between two replacement compressor options. One costs $6400 and is 70% efficient. The other costs $9800 and is 85% efficient. Both have an average life of 8 year

How to find nominal gdp in the current year, Consider an economy that produ...

Consider an economy that produces only three types of fruit: apples, oranges & bananas. In the base year the production & price data are as follows: Fruit

How taxes and subsidies impact market efficiency, Analyze how taxes and sub...

Analyze how taxes and subsidies impact market efficiency. Speculate if market efficiency would be increased or decreased without issues of taxes and subsidies. Justify your respons

Mankiw, Using the Mundell-Fleming model, describe how an increase in a coun...

Using the Mundell-Fleming model, describe how an increase in a country’s risk premium on the world interest rate can result in a higher level of real income. Under what circumstanc

Calculate average cost pricing , Indicate whether each of the following sta...

Indicate whether each of the following statements is true, false, or uncertain, and explain your answer.  Your grade will depend primarily on the quality of your explanation.

Economic functions of money, Money is generally considered to have three ec...

Money is generally considered to have three economic functions: A medium of exchange. This is its most significant role. Without money we would live in a barter economy wher

Budget deficit, A budget deficit is defined as: A. accumulated surpluses mi...

A budget deficit is defined as: A. accumulated surpluses minus accumulated deficits. B. a shortfall of revenues compared to expenditures. C. accumulated deficits minus accumulated

Estimate the wacc and cost of capital, Cowboy Corporation is estimating its...

Cowboy Corporation is estimating its WACC.  The firm's debt structure contains: (1) 30,100 long-term bonds with an 8.1% coupon, paid semiannually, a 10 years-to-maturity, and a $10

Aggregate Demand, According to liquidity preference theory, an increase in ...

According to liquidity preference theory, an increase in the price level causes the interest rate to: a.decrease, which decreases the quantity of goods and services demanded. b.inc

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