CHAPTER 13 SUMMARY: 1. Why does the aggregate demand curve slope downward and what makes it shift? The aggregate demand curve has a negative slope primarily because of the interest rate effect, the consumption link, and the real wealth effect. The interest rate effect stems from the fact that higher prices lead to increased money demand and increased interest rates. The rise in interest rates causes a decrease in investment and consumption, which, in turn, leads to lower aggregate output. The real wealth effect stems from the fact that an increase in prices means that the purchasing power of money holdings and the market value of other assets decreases, which leads to a decrease in consumption and output. The aggregate demand curve will shift if any of the components of aggregate demand increase. This could happen in response to a change in government policy variables. 2. Why does the aggregate supply curve slope upward and what makes it shift? The primary reason for the positive slope of the AS curve is that wages and input prices tend to
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