First of all, Aggregate Demand is the summation of Consumption expenditure, Investment expenditure, government expenditure, and net exports.
AD = C + I + G + NX
The AD curve is drawn on a C2 plane with a GDP level on the X-axis and Price on the Y-axis. The negative relationship between GDP and the price level leads to downward sloping AD curve.
An increase in the price level reduces the consumer's real wealth and consumption expenditure. This is popularly known as Pigou's Wealth Effect.
Also, an increase in the price level will raise the money demand and the interest rates will rise. As there exists inverse relationship between the interest rate and investment, the overall investment level starts decreasing. This is known as the Interest Rate Effect as suggested by JM Keynes.
As home products become relatively expensive due to the increase in the price level, the foreign demand for domestically produced goods will also decrease. Home currency appreciation will occur. This is known as the Exchange Rate Effect proposed by Mundell and Fleming.
So, we see that an increase in the price reduces C, I, G, NX. Hence, the AD will fall with an increase in the price level and the curve is downward sloping.
5. Fully explain why economy's aggregate demand curve has a negative slope. an
1. Explain why the aggregate demand (AD) curve is downward slopping (on the two dimensional price and output planes) in the neoclassical ASAD model. 2. Explain why the aggregate demand (AD) curve is downward slopping (on the two dimensional price and output planes) in the Post-Keynesian ASAD model. 3-4. In the neoclassical ASAD model, let us suppose that the interest rate has no effect on investment. What does this imply for (1) the slope of the IS curve, for (2)...
In the aggregate demand and aggregate supply model, a. the factors that cause the individual supply curve to slope upward are the same as the factors that cause the short-run aggregate supply curve to slope upward. b. the upward-sloping short-run aggregate supply curve intersects the downward-sloping aggregate demand curve to determine the economy's price level and GDP. c. the factors that cause the individual demand curve to slope downward are the same as the factors that cause the aggregate demand...
An expansionary fiscal policy is shown as a: A. Rightward shift in the economy's aggregate demand curve D. Leftward shift in the economy's aggregate demand curve
The economy's long-run equilibrium is at the point where the aggregate demand curve intersects the long-run aggregate supply curve. True False The aggregate supply curve shows the relationship between real GDP and the average price level. True False
1) List and explain the three reasons the aggregate-demand curve is downward sloping. 2) Explain why the long-run aggregate-supply curve is vertical. 3) What causes aggregate demand to shift to the left and what causes an aggregate demand to shift to the right? Give one example for each scenario. 4) Explain why economic fluctuate in the short term and contrast short-term and long-term economic performance. 5) How can we use the aggregate demand and supply models to study the sources...
The aggregate-demand curve Group of answer choices is vertical in the long run. has a slope that is explained in the same way as the slope of the demand curve for a particular product. All of the above are correct. shows an inverse relation between the price level and the quantity of all goods and services demanded.
Explain in detail why the aggregate demand curve slopes downward in the standard IS-LM model. Then explain why the Long-run Aggregate Supply Curve is vertical.
Exercise 4. The slope of the AS curve. a) Why does the AS curve slope upward? b) If the AS curve were more steeply sloped, how would the economy respond differently to aggregate demand shocks (shocks to a)? aggregate supply shocks (shocks to 5)? sloped? c) If the curve were more steeply sloped, how would the economy respond differently to d) What kind of economic changes in the economy would lead the curve to be more steeply
The economic model of aggregate demand curve and aggregate supply curve helps explain the A. three goals of economic policy which are economic growth, high inflation, and full employment. B. expansion and contractions in individual markets. C. shifts in real GDP and the price level. Which of the following descriptions reflects the AD-AS model most accurately? A. Real GDP is shown on the vertical axis and the price level is shown on the horizontal axis. B. Aggregate supply is shown...
Aggregate demand curve The following graph shows the aggregate demand curve in a hypothetical economy. Assume that the economy's money supply remains fixed. Which of the following are reasons the aggregate demand curve is downward sloping? Check all that apply. A lower price level leads to a lower interest rate. A higher price level makes domestically produced goods more expensive than foreign goods. A lower price level increases consumption through the income effect. As the aggregate price level rises, the purchasing power of households' saving balances...