In the first few chapters of this book, we introduced the notion of supply and d
ID: 1192304 • Letter: I
Question
In the first few chapters of this book, we introduced the notion of supply and demand. One of the first things we did was to derive the relationship between the price of a product and the quantity demanded per time period by an individual household. Now we have derived what is called the aggregate demand curve. The two look the same and both seem to have a negative slope, but the logic is completely different. Tell one story that explains the negative slope of a simple demand curve and another story that explains the more complex aggregate demand curve (AD).Explanation / Answer
The demand for good is an inverse relationship between price and quantity. The graphical relationship between price and quantity demanded is depicted by the demand curve. Any point on the demand curve shows the quantity consumer demands for any particular price.
The individual demand curve depicts the negative relationship between price and quantity. If price of a good consumed increases over time, given the money income of the consumer the quantity demanded of the good decreases to maintain the same level of satisfaction.
The gross domestic product (GDP) of an economy is the value of all goods and services produced in a country in a given period of time. The demand for GDP in a given price level and given period of time represented as the aggregate demand in the economy. The aggregate demand in the economy consists of four major components: consumption, investment, government spending, and net export.The gross domestic product (GDP) of an economy is the value of all goods and services produced in a country in a given period of time. The demand for GDP in a given price level and given period of time represented as the aggregate demand in the economy. The aggregate demand in the economy consists of four major components: consumption, investment, government spending, and net export.
The inflation is the sustained increase in general level of prices during a given period of time. The inflation redistributes the real income of the citizen by increasing or decreasing price of the basket of goods they consumes. The decrease in consumption decreases the aggregate demand. Thus aggregate demand decreases as general level of prices increases.
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