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Chapter 24: Q. 2 (page 601)

Describe the mechanism by which demand creates its own supply.

Short Answer

Expert verified

Keynes' Law states that demand creates its own supply.

Step by step solution

01

Step 1. Definitions.

The total quantity of output (i.e. real GDP) firms will produce and sell is aggregate supply

The amount of total spending on domestic goods and services in an economy is aggregate demand.

02

Step 2. Keynes' Law.

Keynes' Law states that demand creates its own supply. An increase in demand for goods than available in the market tends to attract more suppliers due to prices getting higher and increasing profits. The suppliers in the market increase which results in an increase in supply.

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Most popular questions from this chapter

On a microeconomic demand curve, a decrease in price causes an increase in quantity demanded because the product in question is now relatively less expensive than substitute products. Explain why aggregate demand does not increase for the same reason in response to a decrease in the aggregate price level. In other words, what causes total spending to increase if it is not because goods are now cheaper?

What is on the horizontal axis of the AD/AS diagram? What is on the vertical axis?

Suppose the Federal Reserve begins to increase the supply of money at an increasing rate. What impact would that have on GDP, unemployment, and inflation?

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