Answer to Question #286685 in Macroeconomics for Msb

Question

a) Explain why the aggregate demand (AD) curve slopes downwards

b) Why is the aggregate supply curve vertical in the long-run?

c) What is stabilization policy?

d) Write the quantity equation and explain it critically?

e) What does the assumption of constant velocity imply?

Answer 1

a) AD curve slopes downward because output decreases as the price level increases. This implies that they have an inverse relationship.

b) In the long run, AS curve is vertical since it is only capital, labour and technology that affect the supply as everything is assumed to be optimally used. Demand on the other side according to economists affects output temporarily.

c) This is a policy put in place by the government or the central bank to help in maintaining a healthy economic growth and stable prices.

d) MV= PT

This equation is the basis for quantity theory of money and relates to price level and quantity of money.

Where;

M= Quantity of money

V= velocity of circulation

P= price level

T= volume of transactions.

e) The constant velocity of money means that people spend money at the same rate regardless of the economic state.