The reasons for downward sloping aggregate demand curve.

Question

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Answer 1

Question

Chapter 20, Problem 1SQP

To determine

The reasons for downward sloping aggregate demand curve.

Expert Solution & Answer

Explanation of Solution

The aggregate demand curve is downward sloping due to real balances effect, interest rate effect, and net exports effect. The real balance effect implies that a reduction in the price level results in an increasing purchasing power. This leads to an increase in the consumption, and hence the real GDP increases. The interest effect implies that when the money supply is assumed to be fixed, the reduction in the price level leads to a reduction in the interest rate and the demand for borrowing. This implies that the demand for consumption and investment spending increases. The net exports’ effect implies that when the price level is low, the foreign customers are induced to buy more of the domestic products than foreign imports. Since the net exports are a component of the aggregate spending, an increase in the net exports results in an increase in the aggregate spending.

The individual market demand curve is downward sloping due to the income effect, substitution effect, and the law of diminishing marginal utility. The aggregate demand is different from the individual demand, and hence the reasons for the downward slope will also differ.

Economics Concept Introduction

Aggregate demand: The aggregate demand is the total demand of goods and services produced by a country at a given period of time.

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Answer 2

Question

Chapter 20, Problem 1SQP

To determine

The reasons for downward sloping aggregate demand curve.

Expert Solution & Answer

Explanation of Solution

The aggregate demand curve is downward sloping due to real balances effect, interest rate effect, and net exports effect. The real balance effect implies that a reduction in the price level results in an increasing purchasing power. This leads to an increase in the consumption, and hence the real GDP increases. The interest effect implies that when the money supply is assumed to be fixed, the reduction in the price level leads to a reduction in the interest rate and the demand for borrowing. This implies that the demand for consumption and investment spending increases. The net exports’ effect implies that when the price level is low, the foreign customers are induced to buy more of the domestic products than foreign imports. Since the net exports are a component of the aggregate spending, an increase in the net exports results in an increase in the aggregate spending.

The individual market demand curve is downward sloping due to the income effect, substitution effect, and the law of diminishing marginal utility. The aggregate demand is different from the individual demand, and hence the reasons for the downward slope will also differ.

Economics Concept Introduction

Aggregate demand: The aggregate demand is the total demand of goods and services produced by a country at a given period of time.

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Answer 3

Question

Chapter 20, Problem 1SQP

To determine

The reasons for downward sloping aggregate demand curve.

Expert Solution & Answer

Explanation of Solution

The aggregate demand curve is downward sloping due to real balances effect, interest rate effect, and net exports effect. The real balance effect implies that a reduction in the price level results in an increasing purchasing power. This leads to an increase in the consumption, and hence the real GDP increases. The interest effect implies that when the money supply is assumed to be fixed, the reduction in the price level leads to a reduction in the interest rate and the demand for borrowing. This implies that the demand for consumption and investment spending increases. The net exports’ effect implies that when the price level is low, the foreign customers are induced to buy more of the domestic products than foreign imports. Since the net exports are a component of the aggregate spending, an increase in the net exports results in an increase in the aggregate spending.

The individual market demand curve is downward sloping due to the income effect, substitution effect, and the law of diminishing marginal utility. The aggregate demand is different from the individual demand, and hence the reasons for the downward slope will also differ.

Economics Concept Introduction

Aggregate demand: The aggregate demand is the total demand of goods and services produced by a country at a given period of time.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 20, Problem 1SQP

To determine

The reasons for downward sloping aggregate demand curve.

Expert Solution & Answer

Explanation of Solution

The aggregate demand curve is downward sloping due to real balances effect, interest rate effect, and net exports effect. The real balance effect implies that a reduction in the price level results in an increasing purchasing power. This leads to an increase in the consumption, and hence the real GDP increases. The interest effect implies that when the money supply is assumed to be fixed, the reduction in the price level leads to a reduction in the interest rate and the demand for borrowing. This implies that the demand for consumption and investment spending increases. The net exports’ effect implies that when the price level is low, the foreign customers are induced to buy more of the domestic products than foreign imports. Since the net exports are a component of the aggregate spending, an increase in the net exports results in an increase in the aggregate spending.

The individual market demand curve is downward sloping due to the income effect, substitution effect, and the law of diminishing marginal utility. The aggregate demand is different from the individual demand, and hence the reasons for the downward slope will also differ.

Economics Concept Introduction

Aggregate demand: The aggregate demand is the total demand of goods and services produced by a country at a given period of time.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 20, Problem 1SQP

To determine

The reasons for downward sloping aggregate demand curve.

Expert Solution & Answer

Explanation of Solution

The aggregate demand curve is downward sloping due to real balances effect, interest rate effect, and net exports effect. The real balance effect implies that a reduction in the price level results in an increasing purchasing power. This leads to an increase in the consumption, and hence the real GDP increases. The interest effect implies that when the money supply is assumed to be fixed, the reduction in the price level leads to a reduction in the interest rate and the demand for borrowing. This implies that the demand for consumption and investment spending increases. The net exports’ effect implies that when the price level is low, the foreign customers are induced to buy more of the domestic products than foreign imports. Since the net exports are a component of the aggregate spending, an increase in the net exports results in an increase in the aggregate spending.

The individual market demand curve is downward sloping due to the income effect, substitution effect, and the law of diminishing marginal utility. The aggregate demand is different from the individual demand, and hence the reasons for the downward slope will also differ.

Economics Concept Introduction

Aggregate demand: The aggregate demand is the total demand of goods and services produced by a country at a given period of time.

Answer 6

Chapter 20, Problem 1SQP

To determine

The reasons for downward sloping aggregate demand curve.

Expert Solution & Answer

Explanation of Solution

The aggregate demand curve is downward sloping due to real balances effect, interest rate effect, and net exports effect. The real balance effect implies that a reduction in the price level results in an increasing purchasing power. This leads to an increase in the consumption, and hence the real GDP increases. The interest effect implies that when the money supply is assumed to be fixed, the reduction in the price level leads to a reduction in the interest rate and the demand for borrowing. This implies that the demand for consumption and investment spending increases. The net exports’ effect implies that when the price level is low, the foreign customers are induced to buy more of the domestic products than foreign imports. Since the net exports are a component of the aggregate spending, an increase in the net exports results in an increase in the aggregate spending.

The individual market demand curve is downward sloping due to the income effect, substitution effect, and the law of diminishing marginal utility. The aggregate demand is different from the individual demand, and hence the reasons for the downward slope will also differ.

Economics Concept Introduction

Aggregate demand: The aggregate demand is the total demand of goods and services produced by a country at a given period of time.

Answer 7

Chapter 20, Problem 1SQP

To determine

The reasons for downward sloping aggregate demand curve.

Answer 8

Expert Solution & Answer

Explanation of Solution

The aggregate demand curve is downward sloping due to real balances effect, interest rate effect, and net exports effect. The real balance effect implies that a reduction in the price level results in an increasing purchasing power. This leads to an increase in the consumption, and hence the real GDP increases. The interest effect implies that when the money supply is assumed to be fixed, the reduction in the price level leads to a reduction in the interest rate and the demand for borrowing. This implies that the demand for consumption and investment spending increases. The net exports’ effect implies that when the price level is low, the foreign customers are induced to buy more of the domestic products than foreign imports. Since the net exports are a component of the aggregate spending, an increase in the net exports results in an increase in the aggregate spending.

The individual market demand curve is downward sloping due to the income effect, substitution effect, and the law of diminishing marginal utility. The aggregate demand is different from the individual demand, and hence the reasons for the downward slope will also differ.