Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 23: Problem 4

Explain why the aggregate expenditure line is upward sloping, while the aggregate demand curve is downward sloping.

Short Answer

Expert verified
The aggregate expenditure line is upward sloping because an increase in output or income leads to higher total spending. On the other hand, the aggregate demand curve is downward sloping because as the price level decreases, consumers' purchasing power increases leading to a higher demand for goods and services.

Step by step solution

01

Understanding Aggregate Expenditure Line

Aggregate expenditure involves the total consumption, investment, government expenditure, and net exports at different levels of income or production. This line is upward sloping as an increase in output or income leads to an increase in total spending (aggregate expenditure). At lower levels of income, there are involuntary savings as consumption is less than income. As income increases, consumption also increases as there is less of a gap between consumption and income.
02

Understanding Aggregate Demand Curve

The aggregate demand curve represents the total quantity of all goods (or services) demanded by the economy at different price levels. It is downward sloping because as the price level decreases (everything else held constant), consumers have more purchasing power with their current income levels, and they demand more goods and services.
03

Drawing Conclusions

Ultimately, the reason for the difference in slopes of these two curves lies in what each curve is measuring. The aggregate expenditure line reflects behavior related to income or output levels, while the aggregate demand curve deals with price levels and their impact on demand for goods and services.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Explain whether you agree with the following statement: "The reason the aggregate demand curve slopes downward is that when the price level is higher, people cannot afford to buy as many goods and services."

Draw the consumption function and label each axis. Show the effect of an increase in income on consumption spending. Does the change in income cause a movement along the consumption function or a shift of the consumption function? How would an increase in expected future income or an increase in household wealth affect the consumption function? Would these increases cause a movement along the consumption function or a shift of the consumption function? Briefly explain.

Which of the following does the aggregate expenditure model seek to explain: long-run economic growth, the business cycle, inflation, or cyclical unemployment?

What are the three main determinants of net exports? How would an increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) affect U.S. net exports?

(Related to the Chapter Opener on page 776) An article in the Wall Street Journal on changes in Intel's sales noted, "Intel sells its chips to customers in U.S. dollars, but many \(\mathrm{PC}\) makers that buy those chips sell their products in local currencies." In these circumstances, would an increase in the value of the dollar relative to foreign currencies be likely to help or hurt Intel's sales? Briefly explain.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free