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Chapter 12: Aggregate Demand Curve (page 428)

Why does the aggregate demand curve slope down?

Short Answer

Expert verified

the wealth effect, trade effect, and interest effect.

Step by step solution

01

Aggregate demand curve slope 

Aggregate demand can only ever change if consumption of households, investments of firms, spendings by the governments, or spendings on net exports increase or decrease. If the AD is downward sloping, the aggregate demand is changing purely for price level changes.

Price level changes are related to the wealth effect, trade effect, and interest effect.

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Most popular questions from this chapter

In 2008, in the aftermath of the collapse of the housing bubble and a sharp rise in the price of commodities, particularly oil, there was much internal disagreement within the Fed about how to respond, with some advocating lowering interest rates and others contending that this would set off a rise in inflation. Explain the reasoning behind each one of these views in terms of the AD-AS model.

How do you calculate aggregate demand?

A rise in productivity increases potential output, but some worry that demand for the additional output will be insufficient even in the long run. How would you respond?

Describe the short-run effects of each of the following shocks on the aggregate price level and on aggregate output.

a. The government sharply increases the minimum wage, raising the wages of many workers.

b. Solar energy firms launch a major program of investment spending.

c. Congress raises taxes and cuts spending.

d. Severe weather destroys crops around the world.

What are the 4 components of aggregate demand?
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