Aggregate Demand and Aggregate Supply2

Aggregate Demand and Aggregate Supply2 - 2 Why the...

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Unformatted text preview: 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. 63 1—H] 16D 15D A ”:5 I ”J I J 13D ”J I Q n: I B I I 110 I I D I I I I Hill] I I I I {1 “JD 2m 3m] 4DD SCH] Elli] Till] SUD OUTPUT (Billions ofdollars} As the price level falls, the purchasing power of households' real wealth will rise if , causing the quantity of output demanded to rise V’ .This phenomenon is known as the wealfll v’ effect. 5 Points: _ 0.33f1 Explanation: Close Explanation A Households often hold some of their wealth in the form of savings accounts or cash. M the price level falls, the purchasing power of this wealth rises because the money will purchase more ofthe (now lower—priced) goods. According to the wealth efi‘ed’, decreases in the price level increase the quantity ofoutput demanded. Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value ofthe dollar to fall if in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore rise 1’ , and the number offoreign products purchased by domestic consumers and firms (imports) will fall 1" . Net exports will therefore rise 1" , causing the quantity of domestic output demanded t_ This phenomenon is known as the exchange raise 1/ effect. I Points: _ 0.83 f 1 ...
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