As the aggregate price level falls, the quantity of domestic products purchased by foreigners will

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What happens when aggregate price level decreases?
What happens to aggregate demand ad if the price level falls?
What happens when aggregate price level increases?
What happens when aggregate demand decreases?

The aggregate demand (AD) curve shows the real output (real GDP) that people are willing and able to buy at different price levels, ceteris paribus.

The AD curve shows an inverse relationship between price level and domestic output (real GDP in billions). The explanation of the inverse relationship is not the same as for demand of a single product, which centered on substitution and income effect. The explanations are:

1. Wealth and real balances effect: when price level falls, purchasing power of existing financial assets rises, which can increase spending. People fell wealthier when price level falls and will be encouraged to buy more goods and services.

2. Interest-rate effect: when price level increases, businesses and households may have to borrow additional funds to complete their planned purchases. As borrowing demand increases, the interest rate rises, reducing actual borrowing amount and curtail planned consumption and investment. A decline in price level means lower interest rates which can increase certain spending.

3. Foreign purchases effect: when price level falls, other things being equal, US prices will fall relative to foreign prices, which will tend to increase spending on US exports and also decrease import spending in favor of US products that compete with imports.

A change in the quantity demanded of Real GDP occurs because of a change in the price level. This causes a movement along the AD curve, but not a shift of the AD curve. A change in an economic variable other than price would be required to shift the AD curve. The economy consists of four sectors: Household, Business, Government, and foreign sector. Every sector buys a portion of GDP. the sum of their demand is called total expenditure (TE) or aggregate expenditure (AE).

AE = C + I + G + Xn

Factors that change C, I, G, and Xn will change AE and AD. These factors are listed below:

1. Consumption: Wealth, interest rate, income taxes, and expectations about future prices and incomes will change C and shift AD curve.

2. Investment: Interest rate, business taxes, and expectation about future sales will change I and shift AD curve.

3. Foreign Sector: Foreign real national income and exchange rate will change export and import, causing AD curve to shift.

4. Money Supply: The money supply affects interest rates. An increase in money supply will lower interest rate, causing the AD curve to shift to the right.

PRICE LEVELREAL GDP (Billions of dollars)Aggregate DemandA higher price level leads to a higher interest rate.A lower price level increases the real value of consumers' assets.A lower price level increases consumption through the income effect.

9/25/17, 1:27 PMAplia: Student QuestionPage 2 of 2…50000&ck=m_1506361720850_0AAA6B04015E0FE8F58C0FB70000&attempt=2Points:1 / 1Close ExplanationTry Another VersionContinuedemanded.At a higher price level, people require more money to pay for transactions. The demand for money increases and the equilibrium interest raterises. Interest-sensitive spending, such as investment, falls. This is the interest rate effect.Note that the income and substitution effects used to explain the downward slope of the demand curve for a single product donotexplain thedownward slope of the aggregate demand curve.As the aggregate price level falls, the quantity of domestic products purchased by foreigners willrise, causing the quantity ofdomestic output demanded torise. This phenomenon is known as theinternational tradeeffect.Explanation:When an economy's price level falls relative to the price level in the rest of the world, that economy's products become less expensive toforeigners. According to the international trade effect, foreigners purchase more domestically made products when the price level falls. Theincrease in exports associated with a reduction in the price level increases the quantity of domestic output demanded.

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What happens when aggregate price level decreases?

When the price level falls, consumers are wealthier, a condition which induces more consumer spending. Thus, a drop in the price level induces consumers to spend more, thereby increasing the aggregate demand. The second reason for the downward slope of the aggregate demand curve is Keynes's interest-rate effect.

What happens to aggregate demand ad if the price level falls?

In the most general sense (and assuming ceteris paribus conditions), an increase in aggregate demand corresponds with an increase in the price level; conversely, a decrease in aggregate demand corresponds with a lower price level.

What happens when aggregate price level increases?

As the price level rises, the wealth of the economy, as measured by the supply of money, declines in value because the purchasing power of money falls. As buyers become poorer, they reduce their purchases of all goods and services.

What happens when aggregate demand decreases?

Increasing any of these components shifts the AD curve to the right, leading to a greater real GDP and to upward pressure on the price level. Decreasing any of the components shifts the AD curve to the left, leading to a lower real GDP and a lower price level.