1. (rise/fall/reamin the same) 2. (rise/fall/reamin the same) 3. (exhange rate/i
ID: 1226394 • Letter: 1
Question
1. (rise/fall/reamin the same)
2. (rise/fall/reamin the same)
3. (exhange rate/interest rate/wealth)
4. (rise/fall)
5. (rise/fall/reamin the same)
6. (rise/fall/reamin the same)
7. (rise/fall/reamin the same)
8. (rise/fall/reamin the same)
9. (exhange rate/interest rate/wealth)
1. (rise/nominal)
2. (rise/nominal)
3. (rise/nominal)
4. (price neutarility/ the classic ditochmeny/ the quanity theory)
5. (demand/ supply/ quanity of output/ price level)
6. (supply/demand)
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 $300blion. Moving down along the aggregate demand curve from point A to point B, the price level falls to 120, and the quantity of output demanded rises to $500 billion 170 160 150 300,140 140 + 130 110 AD 100 90 1 0 100 200 300 400 500 600 700 800 OUTPUT (Billions of dollars)Explanation / Answer
As the price level falls, the cost of borrowing money will rise, causing the quantity of output demanded to fall. This phenomenon is known as interest rate effect.
This because when price level falls the interest rate increases, as a result the cost of borrowing rises. Due to cost of borrowing rises, quantity demanded will fall.
Additionally as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to fall in foreign exchange markets. The number of domestic products purchased by foreigners(exports) will therefore rise, and the number of foreign products purchased by domestic consumers and firms(imports) will fall. The net exports will therefore rise , causing the quantity of domestic output demanded to rise. This phenomenon is known as the exchange rate effect.
Most economists believe that real economic variables and nominal economic variables behave independently of each other in the long run.
For example, an increase in the money supply, a nominal variable, will cause the price level, a nominal variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a real variable. The separation of real variables and nominal variables is known as the classical ditochmeny.
The horizontal axis of the aggregate demand and aggregate supply model measures the overall output or real GDP. (Note : it can be both of them that I mentioned, please select one of them as per the options given).
The aggregate demand curve shows the quantity of output that households, firms, the government, and foreign customers want to buy at each price level.
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