Explain why the following statements are false. a. "The aggregate-demand curve slopes downward because it is the horizontal sum of the demand curves for individual goods." b. "The long-run aggregate-supply curve is vertical because economic forces do not affect longrun aggregate supply." c. "If firms adjusted their prices every day, then the short-run aggregate- supply curve would be horizontal." d. "Whenever the economy enters a recession, its long-run aggregate-supply curve shifts to the left"

The aggregate-demand (AD) curve is a vital concept in understanding overall market demand for goods and services at different price levels. Unlike the presumption that it's a horizontal sum of individual demand curves, the AD curve indeed slopes downward, but for different reasons.

Why does this happen? Picture a seesaw: as the price level on one end goes down, aggregate demand goes up on the other. This is driven primarily by the wealth effect, interest-rate effect, and exchange-rate effect. The wealth effect states that lower price levels increase consumers' purchasing power, allowing them to buy more. The interest-rate effect suggests that lower prices reduce the demand for money, leading to lower interest rates and hence more attractive borrowing conditions for consumers and businesses. Lastly, the exchange-rate effect explains that when domestic prices fall, domestic currency becomes relatively cheaper, fostering an increase in exports and a decrease in imports.

Turning our sights to the long-run aggregate-supply (LRAS) curve, we're looking at an economy's total production capacity at full employment. This curve is vertical, challenging the idea that it doesn't bend due to external economic forces.

In the long run, an economy's productive capacity is determined by tangible resources like labor and capital, technology, and institutional frameworks. So, it's not that these forces don't impact the LRAS, but rather, they shift its position. For example, advancements in technology can shift the curve to the right, indicating an increase in potential output. What stays unchanged is the price level's inability to influence the quantity supplied in the long run.

The short-run aggregate-supply (SRAS) curve shows us how much firms are willing to produce at varying price levels before they have time to adjust all costs. A common misconception is that if prices were adjusted constantly, the SRAS would be flat. However, because the SRAS reflects some degree of price stickiness, it actually slopes upwards.

Even with daily price adjustments, there are menu costs and contracts that prevent immediate changes to all prices and wages. As the price level increases, profitability rises, and firms tend to increase their supply of goods and services, hence the upward slope.

An understanding of economic recessions requires distilling what actually takes place during these periods of economic downturn. It's a common fallacy to think recessions cause the long-run aggregate-supply curve to shift left.

Recessions are more closely linked to movements along the existing aggregate-supply curves rather than shifts in the curve itself. Factors like decreased consumer confidence and lower spending push the aggregate-demand curve to the left. This results in reduced economic activities but doesn't necessarily reflect reduced economic capacity, which is what a shift in the long-run aggregate-supply would imply.

In the economy, prices are ever-changing. When we talk about price level adjustments, we're referring to the overall change in the price of goods and services. Over time, prices can adjust to reflect changes in supply and demand.

Inflation and deflation are two sides of this coin—where the former means rising price levels and the latter indicates falling price levels. These adjustments can alter consumers' purchasing power and influence the decisions of firms, ultimately impacting economic output and employment.

To dive deeper into the wealth effect, it's vital to understand the psychological impact varying price levels have on consumers. When the general price level decreases, individuals find themselves with more disposable income, and thus, they 'feel' wealthier.

This increase in perceived wealth encourages more consumer spending, which in turn increases aggregate demand. Conversely, when the price level rises, consumers may pull back on spending, leading to a decrease in aggregate demand.

The relationship between price levels and interest rates is encapsulated in the interest-rate effect. As price levels fall, people need less money to buy the same amount of goods and services. This usually results in lower demand for money, which in turn, prompts banks to lower interest rates to encourage borrowing.

Lower interest rates make it cheaper to finance investments and large purchases, further stimulating economic activity and boosting aggregate demand. This is a key mechanism by which monetary policy impacts the economy.

Last but not least, the exchange-rate effect can influence the international trade component of aggregate demand. As domestic price levels drop, domestic currency tends to get stronger relative to foreign currencies.

This dynamic makes foreign goods more expensive relative to domestic ones, thus boosting exports and diminishing imports. The net effect is an increase in aggregate demand due to more favorable conditions for domestic producers on the global market.