Question

What was the rationale for building aggregate demand-aggregate supply model while aggregate expenditures model was already available to study the macroeconomy?

Answer 1

Answer:

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Explanation:

The Keynesian perspective focuses on aggregate demand. The idea is simple: firms produce output only if they expect it to sell. Thus, while the availability of the factors of production determines a nation’s potential GDP, the amount of goods and services actually being produced and sold, i.e. real GDP, depends on how much demand exists across the economy. Suppose GDP is less than potential. Then changes in aggregate demand translate directly into changes in GDP, with no change in the price level. In short, real GDP is determined only by aggregate demand, not aggregate supply.