As the price level falls, households’ real wealth will (fall, rise, remain the s
ID: 2443210 • Letter: A
Question
As the price level falls, households’ real wealth will (fall, rise, remain the same), causing the quantity of output demanded to (fall, rise, remain the same).
Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to (fall, rise) in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore (fall, rise, remain the same), and the number of foreign products purchased by domestic consumers and firms (imports) will (fall, rise, remain the same). Net exports will therefore (fall, rise, remain the same), causing the quantity of domestic output demanded to (fall, rise, remain the same).
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 point B, the price level falls to 120, and the quantity of output demanded rises to $500 billion. 170 180 150 140 -130 110 100 90 100 200 300 400 700 800 OUTPUT (Billions of dollars)Explanation / Answer
As per the given information is the question, the answer are as follows.
As the price level falls, households’ real wealth will rise, causing the quantity of output demanded to rise.
Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to rise 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. Net exports will therefore rise, causing the quantity of domestic output demanded to rise.
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