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Question one.
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A question is divided into three parts.
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Let us first look at the definition of an aggregate demand curve.
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In macroeconomics, the focus is on the demand and supply of all goods and services produced by an economy.
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Accordingly, the demand for all individual goods and services is also combined and referred to as the aggregate demand.
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Let us first look at a diagram of the above definition to understand the concept in depth.
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The aggregate demand curve has price level on the y -axis and real domestic output, which is the gdp on the x -axis.
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It is a downward sloping curve.
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It is downward sloping due to three main reasons.
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The ad curve shows that as the price level drops, purchases of real domestic output increases.
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The ad curve slopes downward for three reasons.
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The first is interest rate effect.
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Putting that down here.
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As the first reason, we assume that the supply of money is fixed.
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When the price level increases, more money is needed to make purchases and pay for inputs.
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With the money supply fixed, the increased demand for it will drive up its prices and the rate of interest.
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These higher rates will decrease the buying of goods with borrowed money, thus decreasing the amount of real output demanded.
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The second is wealth or real balances effect.
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Putting that down as a second reason.
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As price level rises, the real value, which is the purchasing power of money and other accumulated financial assets, such as bonds, will decrease.
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People will therefore become poorer in real terms and decrease the quantity demanded of output.
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The third reason for a downward sloping ad curve is foreign purchases effect.
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As the united states ' price level rises relative to other countries, americans will buy more abroad in preference to their own output...