3. Why the aggregate demand curve slopes downwardThe following graph shows the aggregate demand (AD) curve in a hypothetical economy. At point A, the price level is 120, and the quantity of outputdemanded is $500 billion. Moving up along the aggregate demand curve from point A to point B, the price level rises to 140, and the quantity ofoutput demanded falls to $300 billion.170180150B140130A120110AD10090100200300400500600700800REAL GDP (Billions of dollars)PRICE LEVEL As the price level rises, the cost of borrowing money willcausing the quantity of output demanded to. This phenomenon is known as theeffect.When an economy's price level rises, ceteris paribus, the domestic price level relative to the price level in other countries willThis means thatdomestic exports will be relativelypreviously. The number of domestic products purchased by foreigners (exports) will thereforeexpensive than before, while foreign imports will be relativelyexpensive than they wereand the number of foreignproducts purchased by domestic consumers and firms (imports) willNet exports will thereforecausing the quantity of domestic output demanded to. This phenomenon is known as theeffect.

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The following graph shows the aggregate demand (AD) curve in a hypothetical economy. At point A, the price level is 120, and the quantity of output demanded is $500 billion. Moving up along the aggregate demand curve from point A to point B, the price level rises to 140, and the quantity of output demanded falls to $300 billion.

The following graph shows the aggregate demand (AD) curve in a hypothetical economy. At point A, the price level is 120, and the quantity of output demanded is $500 billion. Moving up along the aggregate demand curve from point A to point B, the price level rises to 140, and the quantity of output demanded falls to $300 billion.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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