2 . Why the aggregate demand curve slopes downward The following graph shows the aggregate demand (AD) curve in a hypothetical economy. At point A, the price level is 140, and the quantity of output demanded is $300 billion. Moving down along the aggregate demand curve from point A to point B, the price level falls to 120, and the quantity of output demanded rises to $500 billion. 1 . Explaining short-run economic fluctuations Most economists believe that real economic variables and nominal economic variables behave independently of each other in the long run. For example, an increase in the money supply, a '7 variable, will cause the price level, a V variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a 7 variable. The notion that an increase in the quantity of money will impact the price level but not the output level is known as T . In the short run, however, most economists believe that real and nominal variables are intertwined. Economists use the model of aggregate demand and aggregate supply to examine the economy's short-run uctuations around the long-run output level. The following graph shows an incomplete shortrun aggregate demand (AD) and aggregate supply (AS) diagramit needs appropriate labels for the axes and curves. You will identify some of the missing labels in the questions that follow. AS VERTICAL AXIS AD HORIZONTAL AXISThe horizontal axis of the aggregate demand and aggregate supply model measures the overall The aggregate curve shows the quantity of goods and services that firms produce and sell at each price level.\fAs the price level falls, the cost of borrowing money will , causing the quantity of output demanded to . This phenomenon is known as the effect. Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to _ in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore , and the number of foreign products purchased by domestic consumers and firms (imports) will . Net exports will therefore causing the quantity of domestic output demanded to . This phenomenon is known as the effect.3 . Determinants of aggregate demand The following graph shows an increase in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the right from AD1 to AD2, causing the quantity of output demanded to rise at all price levels. For example, at a price level of 140, output is now $400 billion, where previously it was $300 billion.170 160 150 140 130 PRICE LEVEL 120 AD 2 110 AD 1 100 90 0 100 200 300 400 500 600 700 800 OUTPUT (Billions of dollars)The following table lists several determinants of aggregate demand. Complete the table by indicating the change in each determinant necessary to increase aggregate demand. Change Needed to Increase AD Wealth Taxes Expected rate of return on investment Incomes in other countries4 . The slope and position of the longrun aggregate supply curve Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. D The quantity of physical capital D The ination rate D The size of the labor force D The price level Suppose the economy produces real GDP of $50 billion when unemployment is at in; natural rate. Suppose the economy produces real GDP of $50 billion when unemployment is at its natural rate. Use the purple points (diamond symbol) to plot the economy's long-run aggregate supply (LRAS) curve on the graph. 132 128 LRAS 124 120 116 PRICE LEVEL 112 108 104 100 10 20 30 40 50 60 70 80 OUTPUT (Billions of dollars)Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to V , which will: 0 Shift the long-run aggregate supply curve to the left 0 Not affect the long-run aggregate supply curve 0 Shift the long-run aggregate supply curve to the right In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift Many workers leave to pursue more lucrative careers in foreign economies. v A scientic breakthrough signicantly increases food production per acre of farmland. '7 A government-sponsored training program increases the skill level of the workforce. '7