Four key markets and the circular flow of income

The circular-flow diagram is a visual model of the economy. The circular flow of income is coordinated by four key markets.

The resource market coordinates businesses demanding resources and households supplying them in exchange for income.The loanable funds market brings the net saving of households plus the net inflow of foreign capital into balance with the borrowing by businesses and governments.The foreign exchange market brings the purchases (imports) from foreigners into balance with sales (exports plus net inflow of capital) to them.The goods and services market coordinates the demand (consumption, investment, government purchases, and net exports) with the supply of domestically produced goods and services (real GDP).

\f3. 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. (?) 170 180 150 A 40 130 PRICE LEVEL B 120 110 AD 0 100 200 300 10 500 600 700 800 OUTPUT (Billions of dollars) As the price level falls, the cost of borrowing money will , causing the quantity of output demanded to 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 therefore4. Determinants of aggregate demand The following graph shows a decrease in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the left from AD, to AD2, causing the quantity of output demanded to fall at all price levels. For example, at a price level of 140, output is now $200 billion, where previously it was $300 billion. (?) 170 180 150 140 PRICE LEVEL 130 120 110 AD 100 AD 2 0 100 200 300 400 500 600 700 800 OUTPUT (Billions of dollars)? LRAS 140 130 SRAS 120 110 100 PRICE LEVEL AD 70 80 60 65 70 75 80 85 90 95 100 OUTPUT Given the economic conditions depicted by the graph, answer the following questions. True or False: The economy is currently in short-run equilibrium. O True O False The current level of real GDP is the full-employment level of GDP.? LRAS 140 130 SRAS 120 110 100 PRICE LEVEL AD 70 80 85 70 75 80 90 95 100 OUTPUT Given the economic conditions depicted by the graph, answer the following questions. True or False: The economy is currently in long-run equilibrium. O True False The economy is best described as being