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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

Some politicians have suggested tying the minimum wage to the consumer price index (CPI). Using the AD/AS diagram, what effects would this policy most likely have on output, the price level, and employment?

Review the problem in the Work It Out titled

"Interpreting the AD/AS Model." Like the information provided in that feature, Table 24.2shows information on aggregate supply, aggregate demand, and the price

level for the imaginary country of Xurbia.

a. Plot the AD/AS diagram from the data. Identify

the equilibrium.

b. Imagine that, as a result of a government tax

cut, aggregate demand becomes higher by 50at

every price level. Identify the new equilibrium.

c. How will the new equilibrium alter output? How

will it alter the price level? What do you think

will happen to employment?

How is the natural rate of unemployment illustrated in an AD/AS model?

Suppose the U.S. Congress passes significant immigration reform that makes it more difficult for foreigners to come to the United States to work. Use the AD/AS model to explain how this would affect the equilibrium level of GDP and the price level.

How is recession illustrated in an AD/AS model?
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