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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

List and explain the three reasons the aggregate-demand curve slopes downward.

To determine

The reasons why the aggregate demand curve slopes downward.

Explanation

The demand comes from all the economic agents such as the households, firms as well as the government. The demand depends on the price level of the economy. The increase and decrease in the price level determines the level of demand in the economy. The aggregation of all the individual demands in the economy is known as the aggregate demand thus, the aggregate demand explains the relationship between the general price level and the level of real GDP demanded in the economy by the economic agents such as the households, firms and the government. The aggregate demand (AD) slopes downward and there are three main reasons behind the downward sloping of AD curve and they are the wealth effect, the interest effect and the international trade effect.

1. Wealth effect: The wealth effect refers to the effect of a change in the price that has on the wealth of the individual. The increase in the price level will decrease the real value of the wealth of a household or an individual. Thus, one has to pay more of his wealth to receive the commodity for consumption. Thus, the increase in price leads to the decrease in the real value of the wealth of the individual and decreases the consumption by the individual and vice versa when the price level falls. Since the aggregate demand curve is the aggregation of the all the individual demand curves in the economy, the aggregation of the individual demand curves will make the AD to slope downward...

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