Building the Model: Aggregate Supply

How Does Real Gdp Effect Money Demanded Curve Definition
How Does Real Gdp Effect Money Demanded Curve
How Does Real Gdp Effect Money Demanded Curve Graph
How Does Real Gdp Effect Money Demanded Curve Diagram
How Does Real Gdp Effect Money Demanded Curve Graph
How Does Real Gdp Effect Money Demanded Curve Chart

The aggregate supply is the relationship between the quantity of real GDP supplied and the price level when all other influences on production plans (the money wage rate, the prices of other resources, and potential GDP) remain constant. The AS curve, as shown in Figure 6.1, is upward-sloping. This slope reflects that a higher price level, combined with a fixed money wage rate, lowers the real wage rate, thereby increasing the quantity of labor employed and, hence, increasing real GDP. The potential GDP line is vertical because it is moving along at both the price level rate and money wage rate, and money prices of other resources change by the same percentage. ⁽²⁰⁾

Why does the AS Curve Slope Upward?

When the price level rises and the money wage rate is constant, the real wage rate falls and employment increases. The quantity of real GDP supplied increases. When the price level falls and the money wage rate is constant, the real wage rate rises and employment decreases. The quantity of real GDP supplied decreases. When the price level changes and the money wage rate and other resource prices remain constant, real GDP departs from potential GDP and there is a movement along the AS curve. ⁽²⁰⁾

An increase in GDP will raise the deamnd for money because people will need more money to make the transactions necessary to purchase the new GDP. In other words, real money demand rises due to the transactions demand effect. Changes in the nominal rate of interest change the quantity of money demanded. With real GDP Y. And price level P. On the other hand, with an inelastic money demand curve investment expenditure increases by a higher amount to. 2, which in turn shifts the AD curve to a further right from AD. This moves equilibrium to E. 2, with real GDP at its potential level Y. and price level P. An increase in real GDP, the price level, or transfer costs, for example, will increase the quantity of money demanded at any interest rate r, increasing the demand for money from D1to D2. The quantity of money demanded at interest rate rrises from Mto M′. Real GDP demanded, holding everything else constant. A change in the price level not caused by a component of real GDP changing results in a movement along the AD curve. A change in some component of aggregate demand, on the other hand, will shift the AD curve. Shifts of the AD curve, vs. Movements along it. Gross domestic product, or GDP is used as a measure for the size of an economy based on the monetary value of all finished goods and services made within a country during a specific period.

What Shifts the Aggregate Supply?

Aggregate supply changes when any influence on production plans, other than the price level, changes. In particular, aggregate supply changes when:

Potential GDP changes
The money wage rate changes
The money prices of other resources change

When potential GDP increases, aggregate supply increases and the AS curve shifts rightward. The potential GDP line also shifts rightward. Short-run aggregate supply changes and the AS curve shifts when there is a change in the money wage rate or other resource prices. A rise in the money wage rate or other resource prices decreases short-run aggregate supply and shifts the AS curve leftward. In this case, the potential GDP line does not shift. ⁽²⁰⁾

Building the Model: Aggregate Demand

Aggregate Demand

The quantity of real GDP demanded is the sum of consumption expenditure ( C ), investment ( I ), government expenditures ( G ), and net exports ( X âˆ’ M ), or:

Y = C + I + G + (X — M)

X = Exports and M = Imports

The relationship between the quantity of real GDP demanded and the price level is called aggregate demand . Other things remaining the same, the higher the price level, the smaller is the quantity of real GDP demanded. In Figure 6.2, the AD curve is downward sloping. Moving along the aggregate demand curve, the only thing that changes is the price level. ⁽²⁰⁾

Why does the AD Curve Slope Downward?

There are three reasons for the negative relationship between the price level and the quantity of real GDP demanded:

The buying power of money : When the price level rises, the buying of money decreases and so people decrease consumption expenditure.
The real interest rate : When the price level rises, the demand for money increases, which raises the nominal interest rate. Because the inflation rate does not immediately change, the real interest rate also rises so that people decrease their consumption expenditure and firms decrease their investment.
The real price of exports and imports : When the price level rises, domestic goods become more expensive relative to foreign goods, so people decrease the quantity of domestic goods demanded. ⁽²⁰⁾

What Shifts the Aggregate Demand?

Any factor that influences expenditure plans, other than the price level, changes aggregate demand and shifts the aggregate demand curve. Factors that change aggregate demand are:

Expectations : Expectations of higher future income, expectations of higher future inflation, and expectations of higher future profits increase aggregate demand and shift the AD curve rightward.
Fiscal policy and monetary policy : The government influences the economy by setting and changing taxes, making transfer payments, and purchasing goods and services, which is called fiscal policy. Tax cuts, increased transfer payments, or increased government purchases increase aggregate demand. Monetary policy consists of changes in interest rates and in the quantity of money in the economy. An increase in the quantity of money and lower interest rates increase aggregate demand.
The world economy : Exchange rates and foreign income affect net exports ( X âˆ’ M ) and, therefore, aggregate demand. A decrease in the exchange rate or an increase in foreign income increases aggregate demand. ⁽²⁰⁾

Let us make in-depth study of the money market equilibrium in an economy.

Introduction:

Money market is in equilibrium when at a rate of interest demand for and supply of money are equal.

It is worth noting that in the money market people increase or decrease the money they hold by selling short-term bonds that carry a fixed rate of interest. These bonds may be of corporate companies, generally called corporate bonds or debentures or may be securities of government, which are called treasury bills.

Money as a Financial Asset:

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The wealth of a household and a business firm consists of tangible assets such as a house, commercial property and the value of financial assets.

Financial assets include:

(1) Stocks, that is, equity shares of corporate firms (i.e. public limited companies),

(2) Bonds which carry a fixed rate of interest and

(3) Money.

Money is a financial asset.

It is important to note that money is different from income or wealth. In macroeconomics demand for money has a narrower meaning. Demand for money is a part of wealth of the people which they want to hold in the form of money rather than other assets. What part of their wealth people want to hold in the form of money determines the demand for money to hold.

Transactions and Speculative Demand for Money:

Broadly speaking, people demand money for two purposes:

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(1) Transactions demand for money and Online earn money by typing words.

(2) Speculative demand for money.

When the number of transactions in the economy increases, demand for money increases. The most important factor determining the volume of transactions is

How Does Real Gdp Effect Money Demanded Curve