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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

Explain the three reasons the aggregate-demand curve slopes downward. • Give an example of an event that would shift the aggregate-demand curve. In which direction would this event shift the curve?

To determine

Why Aggregate demand curve slopes downwards.

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) curve slopes downward and the main reasons behind the downward sloping AD curve are the wealth effect, the interest effect and the international trade effect. This can be explained as follows:

Wealth effect: The wealth effect refers to the effect of a change in the price which has on the wealth of an individual. The increase in the price level will decrease the real value of the wealth of the household or the individual. Thus, he have to pay more of his wealth to receive the commodity for consumption. Thus, the price increase 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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