Chapter 22, Problem 1Q

To determine

To explain: The reason due to which aggregate demand curve slope downward and the short run aggregate supply curve slope upward.

Explanation of Solution

There are the two main reasons due to which aggregate demand curve is downward sloping and these are wealth effect and interest rate effect. As it is known that the nominal value of the money is fixed but the real value is dependent on the price level. This is because, when the price of the product is lower than the purchasing power of consumer increase per unit. It means that wealth of the consumer decrease with the increase in inflation and decrease with increase in inflation. Due to this aggregate demand curve is downward slopping.

The second reason of downward sloping of the aggregate demand curve is rate of interest. The rate of interest affects the demand of the currency because if the rate of interest goes down, then the demand for the currency will increase. If the rate of interest high than the demand for the current will decrease due to which aggregate demand curve goes downward slope.

The reason of upward sloping of short run aggregate curve is increase in the price levels because the producers increase their supply in the market, when the price of the product increases. This is the reason due to which aggregate supply curve is up word in short run.

Economics Concept Introduction

Introduction:Aggregate demand is the overall demand of the economy for final goods and services at a given point of time. Aggregate supply is the total amount of final goods and services that are supplied into the market of an economy in a particular period of time.