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During the Depression, unemployment rose to 25 percent. The AS/AD model presented in the book suggests...

During the Depression, unemployment rose to 25 percent. The AS/AD model presented in the book suggests that a fall in the price level would have lowered income, which would have shifted aggregate demand back further. Demonstrate the standard argument graphically. How does it deal (or not deal) with that interconnection between a fall in the price level and aggregate demand?

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Answer #1

Show the AS-AD diagram as follows:


In the chart above, it very well may be seen that when there is decline in total interest then the interest bend will move to one side which will diminish the just as yield. Furthermore, decline in yield diminishes work further.

At the point when the interest bend movements to one side then the genuine GDP diminishes, which implies that the general creation of the economy has diminished. At the point when generation has diminished then the work request will likewise diminish which will cause higher joblessness rate.

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