Aggregate Supply and Demand Essay

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Aggregate Supply and Demand The quantity theory can be shown graphically in terms of the aggregate-supply aggregate-demand framework that has become popular in macroeconomic textbooks. Aggregate demand is the amount people will spend, or money multiplied by velocity. If money is 30 and velocity is 7, total spending will be 210. Total spending of 210 can be divided between 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 is 3, Q will be 70, if P is 5, Q will be 42, etc. When graphed with axes of price level and transactions, aggregate demand has the form of a rectangular hyperbola.1 This aggregate-demand curve is shown below as the MV curve. The…show more content…
Other macroeconomic theories will give us somewhat different views of aggregate supply and aggregate demand. We will see some of these different views in upcoming chapters. An examination of commodity monies helps explain the quantity theory. Commodity Monies Money in modern economies is mostly bank debt, and thus the market for money balances can be considered as part of financial markets. However, past societies used commodity monies, that is, the thing they used as money was valuable both as a money and for some other purpose. Gold and silver have been popular commodity monies, and cigarettes are another example. With a commodity money, the market for money balances is part of the markets for goods and services. The quantity theory suggests that a society that uses a commodity money will be subject to disturbances that are different from those which affect a society using bank-debt money. This difference exists because the forces that determine the amount of a commodity money are different from those that determine a credit money. An examination of how a system of commodity money works can be done with supply and demand analysis, and it points out some important predictions of the quantity theory. A commodity money can give rise to a large amount of price instability if either there are large changes in the supply of the commodity or if there are large changes in
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