Ans 2: Keynesian Model uses four main components to reach equilibrium in the economy, namely Aggregate demand, Aggregate supply, Price level and Real GDP(employment level).
Aggregate demand is the sum total demand of the economy. It is the corresponding demand given the level of Real GDP and price. Aggregate demand mainly constitutes of four factors affecting it- Personal consumption, Business Investment, Government Spending, Net Exports. Any changes in the above factors result in a shift in Aggregate demand.
Aggregate supply is the sum total of goods and services supplied by the producers in the economy. It is the corresponding supply given the level of Real GDP and price. Factors affecting the Aggregate supply are Productivity level, Input prices, Business taxes, and regulation. Any changes in the above factors result in a shift in Aggregate supply.
Price level is a range of prices of goods and services in the economy. The equilibrium price level is determined by the intersection of aggregate supply and aggregate demand curves.
The diagram below shows the interactions between the above curves where E shows the equilibrium level.
The slope of Aggregate Demand curve:
The aggregate demand curve and price level show an inverse relationship. Any increase in price level results in a decrease in the aggregate demand and vice versa. Therefore, the shape of the curve is downward sloping. There are numerous reasons behind the inverse relationship between aggregate demand and price level:
Shifts in Aggregate Demand Curve
the rightward shift of the AD curve can occur due to:
The diagram below shows the shift in AD curve to AD' which resulted in an increase in the price level from P to P' and Increase in Real GDP from RGDP to RGDP'. This increase in price level due to an increase in aggregate demand is known as Demand-Pull Inflation.
2. Please briefly define aggregate demand (AD), aggregate supply (AS), and the price level (P). Why...
The economic model of aggregate demand curve and aggregate supply curve helps explain the A. three goals of economic policy which are economic growth, high inflation, and full employment. B. expansion and contractions in individual markets. C. shifts in real GDP and the price level. Which of the following descriptions reflects the AD-AS model most accurately? A. Real GDP is shown on the vertical axis and the price level is shown on the horizontal axis. B. Aggregate supply is shown...
Define demand-pull inflation. Using the AS/AD model, explain how demand-pull inflation affects the level of aggregate output and the price level in the economy (which curve shifts, in what direction, and what happens to equilibrium output and price level). Give an example of macroeconomic policy that can be used to counter the effects of demand-pull inflation and discuss its effect on the equilibrium output and price level.
The data below represents the price level, the aggregate demand, and the aggregate supply data for an economy. Use the data points to plot an aggregate demand curve and aggregate supply curve for this economy. Each curve is labeled as AS (Aggregate Supply) or AD (Aggregate Demand) and each point is labeled as a, b, or c from the table headings. 60 Price Level Aggregate Supply (AS) Aggregate Demand (AD) 20 $800 $1,400 $1,000 $1,000 100 $1,200 $600 Provide your...
Use the aggregate supply (AS) curve and aggregate demand (AD) curve below to determine the equilibrium price level and equilibrium real GDP for this economy.
When the price level falls, aggregate demand ______. decreases and the AD curve shifts leftward does not change, but the quantity of real GDP demanded decreases and a movement up along the AD curve occurs does not change, but the quantity of real GDP demanded increases and a movement down along the AD curve occurs increases and the AD curve shifts rightward When Europe trades with Mexico and goes into a recession, ______.
In the aggregate demand/aggregate supply (AD/AS) model, the vertical axis is labeled: aggregate price level. consumption plus investment plus government spending. GDP. consumption.
Given a downward-sloping aggregate demand (AD) curve and an upward-sloping short-run aggregate supply curve (SRAS), equilibrium occurs where the two intersect. The value on the vertical axis is the equilibrium price level and the value on the horizontal axis is the equilibrium value of real GDP or output. What happens to the economy when AD shifts? It is useful to sketch a graph and show the shift. Suppose, for example, interest rates fall or wealth increases due to a stock...
Aggregate Demand AS IT Price Level LAD2 i I AD 10 Real GDP 1. Circle the correct answer: Based on the graph, the (flatter, steeper) aggregate supply curve results in a higher inflation and thus a (smaller, larger) multiplier effect. 2. Is this question true or false? If the aggregate supply curve is vertical, the multiplier will approach infinity. C False True What do you notice about the relationship between the real wage and the price level? Check all that...
Figure: The Money Supply and Aggregate Demand Panel (b) Panel (a) SRAS Price level Price level SRAS P P2 P2 AD P AD AD2 AD YReal GDP (per year) Real GDP Y (per year) Y2 Y Refer to Figure: The Money Supply and Aggregate Demand. If the Federal Reserve intended to encourage investment and interest rates. This is shown in the money supply, and Treasury bills, expand the economy, it would panel buy; increase; lower; (a) buy; decrease; lower; (a)...
The following table shows the initial level of aggregate demand (AD) and te supply (AS) for the economy of Adanac. The full-employment level of output is $500 billion. a. Draw the corresponding initial aggregate demand and aggregate supply curve (AD0 and AS0). b. What is the initial equilibrium price level and level of real GDP? c. At this initial equilibrium (AD0 and AS0), is Adanac experiencing either a recessionary or inflationary gap? If so, how large a gap exists? d. Suppose the aggregate demand in...