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What is the reason AD is downward sloping ? what causes AD to shift? Define OKun's law

What is the reason AD is downward sloping ? what causes AD to shift? Define OKun's law

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
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### Economic Concepts Explained #### What is the reason AD is downward sloping? What causes AD to shift? Define Okun's law 1. **Reason AD is downward sloping:** - The Aggregate Demand (AD) curve shows the total quantity of goods and services demanded across all levels of an economy at a particular price level. The AD curve is downward sloping because as the price level falls, the quantity of output demanded increases due to the wealth effect, the interest rate effect, and the exchange rate effect. - **Wealth Effect:** Lower price levels increase the real value of money, which increases consumer wealth and thereby consumer spending. - **Interest Rate Effect:** Lower price levels reduce the interest rates, which encourages more borrowing and investment. - **Exchange Rate Effect:** Lower price levels can lead to a depreciation of the currency, making exports cheaper and imports more expensive, thus boosting net exports. 2. **Causes of AD shifts:** - Changes in consumer spending, investment, government spending, and net exports can shift the AD curve. Factors such as changes in household wealth, interest rates, business expectations, fiscal policies, and foreign income and exchange rates can influence these components. - **Consumer Spending:** A rise in consumer confidence or disposable income can increase spending. - **Investment:** Lower interest rates or optimistic business expectations can boost investment. - **Government Spending:** An increase in government expenditures can shift AD to the right. - **Net Exports:** An increase in foreign incomes or a depreciation of the domestic currency can increase net exports. 3. **Definition of Okun's Law:** - Okun's Law is an empirical relationship that relates changes in the unemployment rate to changes in GDP. Specifically, it quantifies the negative correlation between unemployment and GDP growth, suggesting that for every 1% increase in the unemployment rate, GDP will be roughly an additional 2% lower than its potential. #### What should be the function of money? What do you mean by M2? 1. **Function of Money:** - Money serves several key functions in an economy: - **Medium of Exchange:** Money is used to facilitate transactions without the need for a barter system. - **Unit of Account:** Money provides a common measure of the value of goods and services, which simplifies the process of comparing prices. - **Store of Value:** Money can be saved and retrieved in the future, allowing individuals to
Transcribed Image Text:### Economic Concepts Explained #### What is the reason AD is downward sloping? What causes AD to shift? Define Okun's law 1. **Reason AD is downward sloping:** - The Aggregate Demand (AD) curve shows the total quantity of goods and services demanded across all levels of an economy at a particular price level. The AD curve is downward sloping because as the price level falls, the quantity of output demanded increases due to the wealth effect, the interest rate effect, and the exchange rate effect. - **Wealth Effect:** Lower price levels increase the real value of money, which increases consumer wealth and thereby consumer spending. - **Interest Rate Effect:** Lower price levels reduce the interest rates, which encourages more borrowing and investment. - **Exchange Rate Effect:** Lower price levels can lead to a depreciation of the currency, making exports cheaper and imports more expensive, thus boosting net exports. 2. **Causes of AD shifts:** - Changes in consumer spending, investment, government spending, and net exports can shift the AD curve. Factors such as changes in household wealth, interest rates, business expectations, fiscal policies, and foreign income and exchange rates can influence these components. - **Consumer Spending:** A rise in consumer confidence or disposable income can increase spending. - **Investment:** Lower interest rates or optimistic business expectations can boost investment. - **Government Spending:** An increase in government expenditures can shift AD to the right. - **Net Exports:** An increase in foreign incomes or a depreciation of the domestic currency can increase net exports. 3. **Definition of Okun's Law:** - Okun's Law is an empirical relationship that relates changes in the unemployment rate to changes in GDP. Specifically, it quantifies the negative correlation between unemployment and GDP growth, suggesting that for every 1% increase in the unemployment rate, GDP will be roughly an additional 2% lower than its potential. #### What should be the function of money? What do you mean by M2? 1. **Function of Money:** - Money serves several key functions in an economy: - **Medium of Exchange:** Money is used to facilitate transactions without the need for a barter system. - **Unit of Account:** Money provides a common measure of the value of goods and services, which simplifies the process of comparing prices. - **Store of Value:** Money can be saved and retrieved in the future, allowing individuals to
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