170160150A140130В120AD11010090100200300400500600700800OUTPUT (Billions of dollars)PRICE LEVEL As the price level falls, the cost of borrowing money willcausing the quantity of output demandedeffectThis phenomenon is known as thetoin foreign exchangeAdditionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar toand the number of foreignmarkets. The number of domestic products purchased by foreigners (exports) will thereforeproducts purchased by domestic consumers and firms (imports) willNet exports will thereforeeffectcausing the quantity of domestic output demanded toThis phenomenon is known as the

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Asked Oct 19, 2019
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Why the aggregate demand curve slopes downward

The following graph shows the aggregate demand (AD) curve in a hypothetical economy. At point A, the price level is 140, and the quantity of output demanded is $300 billion. Moving down along the aggregate demand curve from point A to point B, the price level falls to 120, and the quantity of output demanded rises to $500 billion.
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AD
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OUTPUT (Billions of dollars)
PRICE LEVEL
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170 160 150 A 140 130 В 120 AD 110 100 90 100 200 300 400 500 600 700 800 OUTPUT (Billions of dollars) PRICE LEVEL

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As the price level falls, the cost of borrowing money will
causing the quantity of output demanded
effect
This phenomenon is known as the
to
in foreign exchange
Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to
and the number of foreign
markets. The number of domestic products purchased by foreigners (exports) will therefore
products purchased by domestic consumers and firms (imports) will
Net exports will therefore
effect
causing the quantity of domestic output demanded to
This phenomenon is known as the
help_outline

Image Transcriptionclose

As the price level falls, the cost of borrowing money will causing the quantity of output demanded effect This phenomenon is known as the to in foreign exchange Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to and the number of foreign markets. The number of domestic products purchased by foreigners (exports) will therefore products purchased by domestic consumers and firms (imports) will Net exports will therefore effect causing the quantity of domestic output demanded to This phenomenon is known as the

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Expert Answer

Step 1

In the given graph in the question, at point A, the price level is 140, and the quantity of output demanded is $300 billion. With downward along the aggregate demand curve from point A to point B, then the price level falls to 120 and the output falls to $500 billion.

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

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Step 2

As the price level falls, this means that the cost of borrowing money will (1) fall as with fall in the price level the interest rate on borrowing is fallen to which means borrowing has become relatively cheaper. With the fall in the cost of borrowing the output demanded in the economy tends to (2) rise. This phenomenon is known as (3) interest rate effect.

Step 3

As the price level falls, then the demand for money falls and people will save more. The higher saving rate will lead to fall in interest rate, which means that the cost of borrowing money falls. The fall in the domestic interest rate will influence domestic investors to invest in foreign markets. This process will increase the supply of dollar in the foreign exchange market and this will lead to (4) fall in the real value of in the foreign exchange market and this will make the US domestic goods relatively cheaper for foreigners and now the foreign goods will become relative expensive for American...

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