Quiz 5 - Sam Fonseca 1. Price level and aggregate...

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Sam Fonseca 1. Price level and aggregate quantity-demanded have a negative relationship; when price level increases, aggregate quantity-demanded falls. The same amount of money now purchases fewer goods and services. This increases the demand for money and causes the money demand curve to shift to the right, resulting in higher interest rates. Higher interest rates causes planned investment to drop, resulting in a decrease in aggregate output. 2. An increase in the price level increases the demand for money, which leads to an increase in the interest rate, which leads to a decrease in consumption, which leads to a decrease in aggregate output/income which leads to a decrease in aggregate demand. 3. A simple demand curve slopes downward because when the price of a single good increases, consumers substitute it for a cheaper alternative. It assumes that other prices and income are fixed. An aggregate demand curve has a negative slope because an increase in price level causes money demand to rise. With the money supply constant, this raises the interest rate to reestablish equilibrium. It is the higher interest rate that causes the aggregate output to fall. 4. If real wealth falls, this leads to a decrease in consumption, which leads to a decrease in aggregate output/income. If the price level increases more than the value of wealth, the real value of wealth decreases since it now has less purchasing power. 5. The aggregate supply curve shows the relationship between the aggregate quantity of output supplied by all firms in an economy and the overall price level. 6.
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Quiz 5 - Sam Fonseca 1. Price level and aggregate...

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