3. interest rate / wealth / exchange rate 4. fall / rise 5-8. rise / fall / rema

Question

3. interest rate / wealth / exchange rate

4. fall / rise

5-8. rise / fall / remain the same

9. interest rate / wealth / exchange rate

3. Why the aggregate demand curve slopes downward Aa Aa 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 B, the price level falls to 120, and the quantity of output demanded rises to $500 billion. You can assume that the economy's money supply remains fixed. PRICE LEVEL 170 160 150 140____--X 130 120__----__--X 110 AD 100 90 0 100 200 300 400 500 600 700 800 QUANTITY OF OUTPUT (Billions of dollars) As the price level falls, the purchasing power of households' real wealth will quantity of output demanded to effect , causing the . This phenomenon is known as the Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore (imports) will domestic output demanded to effect and the number of foreign products purchased by domestic consumers and firms Net exports will therefore , causing the quantity of This phenomenon is known as the

Explanation / Answer

(A)

As price level falls, purchasing power of household wealth rises, causing the quantity of output demanded to rise. This is known as Wealth effect.

(B)

As price level falls, impact on domestic interest rates will cause real value of dollar to rise in foreign exchange market. Exports will therefore rise and imports will fall. Net exports will therefore rise, causing quantity of output demanded to rise. This is known as Exchange rate effect.

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