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Why is the aggregate demand curve downward sloping?
Answer: The aggregate demand function AD is downward sloping as a decrease in the price
level will make the real money supply M/P to increase, which in turn will reduce the nominal
interest rate. The fall in the interest rate will make more investment plans profitable, thus
increasing spending in planned investment, which will increase aggregate demand.
Diff: 2 Type: SA Page Ref: 573
Skill: Recall
Objective List: 24.1 Interpret the aggregate demand and supply framework for the determination
of aggregate output and the inflation rate
Explain through the component parts of aggregate demand why the aggregate demand curve
slopes down with respect to the price level. Be sure to discuss two channels through which
changes in prices affect demand.
Answer: A fall in the price level increases the real value of a fixed nominal money supply. This
increase in the real money supply lowers interest rates. Lower rates increase investment, thereby
increasing aggregate demand. Lower interest rates also cause depreciation of the domestic
currency, increasing net exports and aggregate demand.
Diff: 2 Type: SA Page Ref: 573
Skill: Recall
Objective List: 24.1 Interpret the aggregate demand and supply framework for the determination
of aggregate output and the inflation rate
24.2 Aggregate Supply
The aggregate supply curve shows the relationship between ____.
A) the level of inputs and aggregate output
B) the price level and the level of inputs
C) the wage rate and the level of employment
D) the price level and the level of aggregate output supplied
Answer: D
Diff: 2 Type: MC Page Ref: 576
Skill: Recall
Objective List: 24.1 Interpret the aggregate demand and supply framework for the determination
of aggregate output and the inflation rate
The aggregate supply curve is ____.
A) the total quantity of raw materials offered for sale at different prices
B) the total quantity of final goods and services offered for sale at the current price level
C) the total quantity of final goods and services offered for sale at different price levels
D) the total quantity of intermediate and final goods and service offered for sale at different price
levels
Answer: C
Diff: 1 Type: MC Page Ref: 571
Skill: Recall
Objective List: 24.1 Interpret the aggregate demand and supply framework for the determination
of aggregate output and the inflation rate