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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

On a microeconomic demand curve, a decrease in price causes an increase in quantity demanded because the product in question is now relatively less expensive than substitute products. Explain why aggregate demand does not increase for the same reason in response to a decrease in the aggregate price level. In other words, what causes total spending to increase if it is not because goods are now cheaper?

To determine

Causes of total spending to increase if goods are now cheaper are to be determined.

Explanation

Aggregate Demand is the total demand of all final goods and services at a given time. Aggregate demand constitutes:

Consumers

Firms

Government

Net exports.

Any change in aggregate demand is due to changes in spending by above components.

Behaviors of consumers and firms:

Economic stability affects behavior of consumers and firms. If consumers are confident about the future prospect of economy, i.e. price stability or better returns to investment, the aggregate demand curve will shift rightward. Moreover, if producers feel optimism about the production and investment, then aggregate demand curve will shift rightward...

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