Aggregate Supply and Demand Essay -- Economics

Aggregate generate and DemandThe criterion theory can be shown graphically in terms of the unite-supply aggregate- consider framework that has become hot inmacroeconomic textbooks. Aggregate demand is the inwardness people impartspend, or money multiplied by velocity. If money is 30 and velocity is7, score spending testament be 210. summate spending of 210 can be dividedbetween termss and quantities in a number of ways. If the toll level(P) is 1, quantity (Q) will be 210. If P is 2, Q will be 105, if P is3, Q will be 70, if P is 5, Q will be 42, etc. When graphed with axesof price level and transactions, aggregate demand has the form of aorthogonal hyperbola.1 This aggregate-demand curve is shown below asthe MV curve.The quantity theory assumes that transactions are determined outsidethe mold by the availability of resources and by technology. Becauseit assumes at that place are no adjustment problems, the aggregate supplycurve is the vertical line shown in the graph pre ceding(prenominal) as the T curve. At severally price level the same quantity is available, or price level doesnot influence quantity supplied. The price level is determined by the convergency of these two curves. If the amount of money increases,the aggregate demand curve shifts to the right. Since transactions arefixed, the end results must be an increase in price level. recover that aggregate-supply and aggregate-demand curves aredescribing what happens in the grocery store for goods and services, not inthe commercialise for money balances. If thither is a disturbance in the moneymarket, that disturbance is transmitted to the goods-and-servicesmarket via the aggregate-demand curve. The quantity theory encouragesus to agnise a purchase of goods as a barter of money, and a sale of goodsas a purchase of money. Changes in the resource market are transferredto the goods-and-services market via the aggregate supply curve. Thequantity theory does not see the market for goods and ser vices as theplace disturbances begin. What we see happening in this part of theeconomy is the result of events in other sectors.Though very simple, this model helps constitute sense of a number ofhistoric events. For example, U. S. economic growth in the late 19thcentury, spurred by increases in resources and improving technology,was faster than the growth in money stock. The graph above predictsdeflation... ...lry, tableware, and nice purposes. Their actions will reflectthe law of demand whenever a commodity becomes cheaper, people usemore of it. Thus if there is a sudden influx of money into a countrythat uses it as money, part of the influx will be diverted to itscommodity use, and the effects on the amount of money, and hence onthe price level, will be lessened. On the other hand, a sudden declinewill also be cushioned, because as the commodity grows more valuable,people will transfer it from its commodity use into a monetary use. Ifthe amount of luxurious declines and it r ises in value, there is an incentive to carry down jewelry, tableware, and artistic objects anduse the gold as money. Hence a doubling of gold may not double theamount of money, and cutting the amount of gold by one one-half may notcut money by one half.Second, if money falls in value, the incentive to issue more of itis cut and if it rises in value, the incentive to produce more of itis raised. If the value of gold increases, more people will try tofind it, and if its value declines, less people will search for it.The tertiary reason takes us into the realm of international economics. Aggregate Supply and Demand Essay -- EconomicsAggregate Supply and DemandThe quantity theory can be shown graphically in terms of theaggregate-supply aggregate-demand framework that has become popular inmacroeconomic textbooks. Aggregate demand is the amount people willspend, or money multiplied by velocity. If money is 30 and velocity is7, total spending will be 210. Total spendin g of 210 can be dividedbetween prices and quantities in a number of ways. If the price level(P) is 1, quantity (Q) will be 210. If P is 2, Q will be 105, if P is3, Q will be 70, if P is 5, Q will be 42, etc. When graphed with axesof price level and transactions, aggregate demand has the form of arectangular hyperbola.1 This aggregate-demand curve is shown below asthe MV curve.The quantity theory assumes that transactions are determined outsidethe model by the availability of resources and by technology. Becauseit assumes there are no adjustment problems, the aggregate supplycurve is the vertical line shown in the graph above as the T curve. Ateach price level the same quantity is available, or price level doesnot influence quantity supplied. The price level is determined by theintersection of these two curves. If the amount of money increases,the aggregate demand curve shifts to the right. Since transactions arefixed, the end results must be an increase in price level.Notice that ag gregate-supply and aggregate-demand curves aredescribing what happens in the market for goods and services, not inthe market for money balances. If there is a disturbance in the moneymarket, that disturbance is transmitted to the goods-and-servicesmarket via the aggregate-demand curve. The quantity theory encouragesus to see a purchase of goods as a sale of money, and a sale of goodsas a purchase of money. Changes in the resource market are transferredto the goods-and-services market via the aggregate supply curve. Thequantity theory does not see the market for goods and services as theplace disturbances begin. What we see happening in this part of theeconomy is the result of events in other sectors.Though very simple, this model helps make sense of a number ofhistorical events. For example, U. S. economic growth in the late 19thcentury, spurred by increases in resources and improving technology,was faster than the growth in money stock. The graph above predictsdeflation... ...lry, tableware, and artistic purposes. Their actions will reflectthe law of demand whenever a commodity becomes cheaper, people usemore of it. Thus if there is a sudden influx of gold into a countrythat uses it as money, part of the influx will be diverted to itscommodity use, and the effects on the amount of money, and hence onthe price level, will be lessened. On the other hand, a sudden declinewill also be cushioned, because as the commodity grows more valuable,people will transfer it from its commodity use into a monetary use. Ifthe amount of gold declines and it rises in value, there is anincentive to melt down jewelry, tableware, and artistic objects anduse the gold as money. Hence a doubling of gold may not double theamount of money, and cutting the amount of gold by one half may notcut money by one half.Second, if money falls in value, the incentive to produce more of itis cut and if it rises in value, the incentive to produce more of itis raised. If the value of gold increases, more people will try tofind it, and if its value declines, fewer people will search for it.The third reason takes us into the realm of international economics.