Why the aggregate demand curve slopes downward The graph below shows the aggregate demand (AD) curve for a hypothetical economy. At point X, the quantity of output demanded is $300 billion, and the price level is 140. Moving down along the AD curve from point X to point Y, the quantity of output demanded rises to $500 billion, and the price level falls to 120. As the price level falls, the cost of borrowing money will (REMAIN THE SAME or RISE or FALL), causing the quantity of output demanded to (REMAIN THE SAME or RISE or FALL). This phenomenon is known as the (EXCHANGE RATE or INTEREST RATE or WEALTH) effect. Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to (RISE or FALL) in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore (RISE or FALL or REMAIN THE SAME), and the number of foreign products purchased by domestic consumers and firms (imports) will (RISE or FALL or REMAIN THE SAME). Net exports will therefore (RISE or FALL or REMAIN THE SAME), causing the quantity of domestic output demanded to (RISE or FALL or REMAIN THE SAME). This phenomenon is known as the (EXCHANGE RATE or INTEREST RATE or WEALTH) effect.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Why the aggregate demand curve slopes downward

The graph below shows the aggregate demand (AD) curve for a hypothetical economy. At point X, the quantity of output demanded is $300 billion, and the price level is 140. Moving down along the AD curve from point X to point Y, the quantity of output demanded rises to $500 billion, and the price level falls to 120.

As the price level falls, the cost of borrowing money will (REMAIN THE SAME or RISE or FALL), causing the quantity of output demanded to (REMAIN THE SAME or RISE or FALL). This phenomenon is known as the (EXCHANGE RATE or INTEREST RATE or WEALTH) effect.

Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to (RISE or FALL) in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore (RISE or FALL or REMAIN THE SAME), and the number of foreign products purchased by domestic consumers and firms (imports) will (RISE or FALL or REMAIN THE SAME). Net exports will therefore (RISE or FALL or REMAIN THE SAME), causing the quantity of domestic output demanded to (RISE or FALL or REMAIN THE SAME). This phenomenon is known as the (EXCHANGE RATE or INTEREST RATE or WEALTH) effect.

PRICE LEVEL
170
160
150
140
130
120
110
100
90
0
100
200 300 400 500
OUTPUT (Billions of dollars)
AD
600
700
800
?

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