Question
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
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 120, and the quantity of output demanded is $500 billion. Moving up along the aggregate demand curve from point A to point B, the price level rises to 140, and the quantity of output demanded falls to $300 billion.
As the price level rises, the purchasing power of households' real wealth will _________(fall/rise), causing the quantity of output demanded to _________(fall/rise). This phenomenon is known as the ___________________(exchange rate/interest rate/wealth) effect.
When an economy's price level rises, ceteris paribus, the domestic price level relative to the price level in other countries will ______________(rise/fall). This means that domestic exports will be relatively __________ (more/less) expensive than before, while foreign imports will be relatively __________ (more/less) expensive than they were previously. The number of domestic products purchased by foreigners (exports) will therefore _______ (rise/fall), and the number of foreign products purchased by domestic consumers and firms (imports) will _________ (rise/fall) . Net exports will therefore _______ (rise/fall), causing the quantity of domestic output demanded to __________(rise/fall) . This phenomenon is known as the ______________ (interest rate/open economy/wealth) effect.
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