The variables related to the aggregate demand curve and determinants of its slope.
Explanation of Solution
The aggregate demand curve shows the quantity demand or short-run equilibrium output at different
Besides these factors, income, spending, and net export also affect the slope of aggregate demand. When income increases, the consumption also increases, which lower the demand and vice versa. When inflation rate increases, the uncertainty of price in future among households and firms will be less, which in turn reduces the aggregate demand. If the inflation rate increases, the price of domestic goods will increase, which will be more expensive and in turn decreases the export. These factors determine the slope of the demand curve along with the Fed’s behavior.
Aggregate demand curve: The aggregate demand curve shows the quantity demand at different price levels.
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Chapter 15 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
- Based on research conducted by the Department of Economic Analysis, the government and policy advisors of an economy believe that the full employment GDP is $7500 billion, and Pe, the overall expected price level is 118. In addition, the researchers estimate that the short run aggregate supply equation is Y = Ypot + 80 (P - Pe), where Ypot is the potential level of output. In addition, the researchers estimate that the short run aggregate supply equation is Y = Ypot + 80 (P- Pe), where Ypot is the potential level of output. In 2016, the population was 400 million, and the structure of the economy was described by the following equations for household consumption behavior and taxes received: C = 100+ 0.8DI, and T = 0.25Y where all monetary values are in billions of dollars. Government spending was fixed at $1700 billion, and firm's investment behavior was fixed at $800 billion. Trading is allowed in this economy and in 2016, trading occurred such that the trade account was balanced.…arrow_forwardQ7) At T1, an economy is in long-run equilibrium at a real interest rate of 4%, a price level of 100, and with an expected inflation rate of 0%. If in T2 the actual price level is 95, then in that time period: A) r = 4%, i = 4% B) r= 9%, i -1% C) r= -1%, i 4% Dr= -1%, i 9% 1arrow_forwardThe U.S. economy is initially in short-run macro-equilibrium. Assume that, in the face of Covid-19, firms’ costs increase as they must comply with safety regulations to keep their employees safe at work. As a result, we observe the following in our economy: Question 31 options: a) Both the price level and real GDP decrease b) The price level increases and real GDP falls c) The price level falls and real GDP increases d) Both the price level and real GDP increase.arrow_forward
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