Explain the three reasons the aggregate demand curve slopes downward
What will be an ideal response?
The three reasons are the wealth effect, the interest-rate effect, and the international-trade effect. In the wealth effect, an increase in the price level decreases the real value of household wealth, which decreases consumption. In the interest-rate effect, an increase in the price level raises interest rates, which decreases investment spending and consumption spending, particularly on durable goods. In the international-trade effect, an increase in the price level makes U.S. exports more expensive and foreign imports less expensive, which decreases net exports.
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Consider the budget line labeled RT in the above figure. What would shift the budget line to RS?
A) a rise in the price of good X B) a fall in the price of good X C) a rise in the price of good Y D) a fall in the price of good Y
Eurobanks can offer a ________ rate on dollar loans and a ________ rate on dollar deposits than their domestic U.S. competitors
A) higher, lower B) lower, higher C) lower, lower D) higher, higher
A price support program:
A. lowers the market price by making purchases of a good, thereby increasing demand. B. lowers the market price by making purchases of a good, thereby reducing demand. C. raises the market price by making purchases of a good, thereby increasing demand. D. raises the market price by making purchases of a good, thereby reducing demand.
Which of the following examples shows the problem of using physical units as the measure of total economic activity?
a. Milk is measured by gallons; milk is paid for with dollars. b. Milk is measured by gallons; train travel is measured by miles. c. A gallon of milk weighs more than a gallon of water. d. A plane covers more mph than a train does.