Relationship Between Aggregate Demand And The Price Level

Question (3) a) What is Aggregate Demand? (83%) Aggregate demand is the total amount that all consumers, businesses, government agencies, and foreigners spend on final goods and services. Aggregate demand is represented by the aggregate-demand curve, and it describes the relationship between price levels and the quantity of output that firms are willing to provide. Aggregate demand is not a fixed number because it depends on the price level. The relationship between aggregate demand and the price level normally is a negative relationship, which creates a downward-sloping aggregate demand curve. Aggregate demand is an aggregation of the microeconomic demand. b) Develop a model showing the importance and effects of Aggregate Demand on the overall economy. (83%) The model is aggregate supply/ aggregate demand model (AS/AD Model). The AD/AS model is used to illustrate the Keynesian model of the business cycle. Movements of the two curves can be used to predict the effects that various exogenous events will have on two variables: real GDP and the price level. This model shows the importance of the importance and effect of the aggregate demand on the overall economy. The government through its fiscal policy and the federal bank through its monetary policy try to influence aggregate demand to influence the overall economy. For example, an increase in the nominal money stock, as a result of monetary expansion policy, leads to a higher real money stock at each level ofShow MoreRelatedFiscal Policy And Fiscal Policies838 Words   |  4 Pagesorder to have its economy back on the reasonable range. Fiscal policy affects aggregate demand depending on the government’s spending and taxation. Thus, if the government decides to make changes in its taxation such as discounting corporate taxes, the aggregate demand curve will shift. In addition to that, money spent on public services and welfares will increase government spending which will affect aggregate demand as well. Economic Analysis Fiscal Policy â€Å"Fiscal policy is the changes in federalRead MoreNotes On The Aggregate Demand Curve845 Words   |  4 PagesThe aggregate demand curve shows the relationship between the aggregate price level and (the) aggregate: productivity. unemployment rate. quantity of output demanded by households, businesses, the government, and the rest of the world. quantity of output demanded by businesses only. 2. The aggregate demand curve slopes: downward in part because as the price level falls, the ability of households and firms to borrow cheaply increases. downward in part because when the price level fallsRead MoreAggregate Expenditure And Output Of The Short Run Essay1563 Words   |  7 PagesAggregate expenditure and output in the short run. 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The relationship between aggregate demand and the price level normally isRead MoreKeynesian Views On Money Price Relationship Essay1617 Words   |  7 Pages2.4 Keynesian Views on Money-Price Relationship Keynes accepted the classical view that increase in money supply causes rising prices or inflation only when the aggregate output corresponds to full employment and aggregate supply curve is vertical. Keynes published an article entitled ‘How to Pay for the War’ in 1940, in which he developed a demand side model incorporating inflation process with temporarily rigid prices in the labor market. The primary concern of Keynes was to provide space forRead MoreAs/Ad Model1332 Words   |  6 PagesChapter 10: The Aggregate Demand/Aggregate Supply Model * Keynesian Economics – Economists who focused on the short run * John Maynard Keynes - their leading advocate * the originator of macroeconomics as a separate discipline from micro * Classical Economists – economists who focused on long-run issues such as growth * Aggregate Demand Management – government’s attempt to control the aggregate level of spending in the economy * Equilibrium Income – the level of incomeRead MoreThe Key Concepts in Economics851 Words   |  4 Pageswhole. This information presented to investors. 2. Law of Supply amp; Demand: This is the founding block of economics. As stated in the article, â€Å"Whenever supply of something increases, price decrease and whenever demand increases, price increase† This concept is pretty simple. Williams (2014) further explained the aggregate of supply and demand. a. Aggregate Demand Curve (AD): a curve that shows the level of prices and quantity of real GDP demanded. b. Wealth Affect: The increase inRead MoreDiscuss How Changes on Aggregate Demand Influence Price Levels, Output Levels and Employment.1144 Words   |  5 PagesDiscuss how changes on aggregate demand influence price levels, output levels and employment. The meaning of â€Å"aggregate† is added together. All of the elements introduced in microeconomics are totaled in macroeconomics. Aggregate demand and supply analysis brings together the amount that consumers wish to consume and firms wish to produce at any price levels. Aggregate demand (AD) is the total demand for final goods and services in the economy (Y) at a given time and price level. Also it is the amountRead MoreThe Impact Of Online Retail On Australian Gdp1324 Words   |  6 Pagesare both determinants of aggregate demand for Australia’s Gross Domestic Product, or GDP, a fall in consumer spending and net exports would be likely to cause a fall in aggregate demand, or the total amount of real output that consumers, firms, the government and foreigners want to buy at each possible price level during a particular time period, causing a fall in Australia’s GDP, ceteris paribus. Figure 1: A fall in Australian GDP caused by a fall in aggregate demand Figure 1 represents