Author Question: Why does the aggregate demand curve slope downward? What will be an ideal ... (Read 90 times)

wrbasek0 · **on:** Jun 29, 2018

Why does the aggregate demand curve slope downward?

What will be an ideal response?

Question 2

Refer to Figure 7-1. At the market equilibrium, the deadweight loss is equal to

A) 0. B) 250,000. C) 500,000. D) 1,000,000.

djpooyouma · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The aggregate demand curve slopes downward because of the wealth effect and two substitution effects. First, a rise in the price level decreases real wealth, which brings an increase in saving and a decrease in spendingthe wealth effect. Second, a rise in the price level raises the interest rate, which decreases borrowing and spendingan intertemporal substitution effect as people decrease current spending in favor of future spendingand increases the price of domestic goods and services relative to foreign goods and services, which decreases exports and increases importsan international substitution effect.

Answer to Question 2

C