Answer to Question #147939 in Macroeconomics for Rafat Fatima

Question

How aggregate demand is determined within the classical model ? Effects of change on output and price level due to change in drop of money supply.

Answer 1

AD consists of consumption expenditures, investment expenditures, government expenditures, and net exports (exports minus imports).

Aggregate demand can be represented as the aggregate monetary demand for real gross domestic product at the appropriate price level. The dependence of demand on price dynamics can be shown using the equation of the quantitative theory of money:

MV = PY

$Y=\frac{MV}{P}$