HOMEWORK 3 1. Explain why the aggregate demand curve slopes downward and the sho
ID: 1104274 • Letter: H
Question
HOMEWORK 3 1. Explain why the aggregate demand curve slopes downward and the short-run aggregate supply curve slopes upward. An economy's aggregate demand is shown graphically as a downward-sloping curve. The position of this curve relative to the vertical axis is impacted by six basic factors. The top portion of the following table lists these six factors along with several that do not affect the position of the aggregate demand curve. A response box is attached to each factor. The table's bottom portion contains a labeling key Label any factor that does not impact AD with an X. For a factor that shifts aggregate demand to the right, use the label R; similarly, for a factor that shifts aggregate demand to the left, use the label L. Keep in mind that each factor is to be assessed on the assumption that all else is constant. (Hint: Each letter is used three times.) 2. The Federal Reserve autonomously loosens monetary policy The government adopts ill-advised regulations that diminish the economy's overall efficiency. The government allows previously enacted tax cuts to expire, resulting in much higher taxes for households The prospect of worsening inflation induces the Federal Reserve to tighten monetary policy Consumer pessimism spreads as the media reports disappointing news about the economy Actual output falls below potential output, eliminating "tightness" in resource markets. Foreign economies crash, producing a substantial drop in net exports. Optimism within the business community induces a surge in planned business expenditures. War breaks out, forcing the government to substantially enhance defense expenditures. This factor does not affect the location of the aggregate demand curve. R This factor shifts aggregate demand to the right. This factor shifts aggregate demand to the leftExplanation / Answer
The aggregate demand curve is sloping downward because, of the relationship of the price level and quantity demanded. there is a negative relation with quantity demanded with price level.if price level drops , the quantity demanded increases , similarly, as the price level drops, the national income increases.
the main reasons of downward sloping of aggregate demand curve is a) Pigou's wealth effect,
a) Pigou's wealth effect. suppose the nominal value of money is constant, but the real value of money is depend of the price level. thats why for a given level of income, if the price level drops, then the consumer becomes wealthier and he has more purchasing power than before and thus consumer tends to spend more, as a result it will increase aggreagte demand.
Short-run aggregate supply curve
Short run aggregate supply curve shows the relationship between the price level and quantity supplied.
There are four models which explains the short run aggregate supply curve is upward sloping and that are as follows.
a) sticky-wage model.
b) worker-misperception model.
c) the imperfect-information model
d) sticky- price model.
The main point of these model is to explain the behavior of price level and output supplied. basically there is a positive relation with output supplied and price level. as the price level rises, the output supplied also rises and thus therefore, short run aggregate supply curve is upward sloping.
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