As the price level falls, the purchasing power of households' real wealth will rise remain the same . This phenomenon is known as the exchange rate interest rate wealth fall rise remain the same fall effect.
As the price level falls, the purchasing power of households' real wealth will rise remain the same . This phenomenon is known as the exchange rate interest rate wealth fall rise remain the same fall effect.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:100
90
0
100
200 300 400 500 600 700 800
REAL GDP (Billions of dollars)
rise
remain the same
fall
As the price level falls, the purchasing power of households' real wealth will
rise
. This phenomenon is known as the
remain the same
exchange rate
interest rate
wealth
fall
rise
fall
When an economy's price level falls, ceteris paribus, the domestic price level relative to the price level in other countries will ▼. This means that
less
less
domestic exports will be relatively expensive than before, while foreign imports will be relatively expensive than they were previously. The
more
number of domestic products purchased by foreigners (exports) will therefore_rise, remain the same, and the number of foreign products purchased
rise, remain the same
fall
rise, remain the same,
Net exports will therefore fall
fall
, causing the quantity of
by domestic consumers and firms (imports) will
rise, remain the same,
fall
domestic output demanded to
, causing the quantity of output demanded to
effect.
interest rate
This phenomenon is known as the open economy
wealth
effect.
▼

Transcribed Image Text:The following graph shows the aggregate demand (AD) curve in a hypothetical economy. At point A, the price level is 140, and the quantity of output
demanded is $300 billion. Moving down along the aggregate demand curve from point A to point B, the price level falls to 120, and the quantity of
output demanded rises to $500 billion.
PRICE LEVEL
170
160
150
140
130
120
110
100
90
0
100
A
1
B
200 300 400 500
REAL GDP (Billions of dollars)
AD
600
700
800
?
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