With no entry fee, equilibrium price (P*) and quantity (Q*) are defined where marginal cost (MC) equals the aggregate demand curve
. With an entry fee, price rises to [P.sup.t] and quantity falls to [Q.sup.t].
It can be seen in Figure 1 that when aggregate demand curve
moves to the right, the price increases resulting inflation.
A note on macroeconomic textbooks: the use of the aggregate demand curve
. Journal of Economic Literature, 12(5), 896-97.
For any given increase of aggregate supply with a negatively sloped aggregate demand curve
, the price level will decrease, real GDP will increase, and the net effect on the balance of trade is ambiguous In this case the price level elasticity of demand, by governing the relative strengths of the price level and real GDP changes, determines both the direction of change of the balance of trade and the size of the resultant trade deficit or surplus.
The sixth edition adds a section on the recent crisis in the Eurozone and explains more carefully the distinction between nominal and real interest rates and the constant money supply assumption behind the aggregate demand curve
. ([umlaut] Ringgold, Inc., Portland, OR)
Supply-side policies use the tax and spending powers of government to shift the aggregate supply curve (supply-side fiscal policy), rather than the aggregate demand curve
(demand-side fiscal policy).
Samuelson and Solow ( 1966, 1,348) assumed that the empirical Phillips curve they identified was "a reversible supply curve for labor along which an aggregate demand curve
But when the economy is at full-employment output ([Y.sub.0]), the aggregate supply curve is steep so that a shift right of aggregate demand curve
mainly bids up wages, costs, and prices, with hardly any increase in real output Y.
Ridding economic theory of the aggregate demand curve
should be the single most important theoretical issue of our time.
They also show that the aggregate demand curve
for the convenience provided by Treasury debt is downward sloping, and they provide estimates of the elasticity of demand.
This can be illustrated using the concepts of the aggregate demand curve
and the aggregate supply curve.
The policymaker observes the supply shock and then chooses the price level (making the aggregate demand curve
a horizontal line at the chosen price level).