What impact do the following have on the aggregate demand curve? Give suitable examples to support your answers
a. The Wealth Effect
b. The Interest Rate Effect
c. The Exchange Rate Effect
a. The Wealth Effect: The aggregate demand curve is drawn assuming a fixed amount of wealth. As the price level changes, the purchasing power of wealth has varying effects on the level of consumption spending. For example, if prices fall, a fixed level of wealth will purchase more, consumption will increase, and aggregate quantity demanded will increase. If prices rise, a household's wealth will buy less, and aggregate quantity demanded will decrease.
b. Interest Rate Effect: As the price level falls, buyers require less money for their purchases, and the demand for money falls. A decrease in the demand for money results in a decrease in the interest rate, and interest-sensitive purchases, such as cars, houses, and business investments, increase.
c. The Exchange Rate Effect: As noted earlier, interest rates fall in response to a decrease in the price level. For example, if the overall U.S. price level falls, U.S. interest rates decrease. A decline in U.S. interest rates causes the U.S. dollar to depreciate in foreign exchange markets, making U.S. exports more attractive and imports less attractive. As a result, exports increase, imports decrease, and net exports (EX – IM) increase, resulting in an increase in aggregate quantity demanded. As the price level increases, interest rates increase, the U.S. dollar appreciates, net exports decline, and aggregate quantity demanded decreases.
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Graphically illustrate and explain the effects of an increase in population growth on the Solow growth model. In your answer, you must clearly label all curves and the initial and final equilibria. In your answer, explain what happens to the rate of growth of output per worker and the rate of growth of output as the economy adjusts to this increase in population growth
What will be an ideal response?
Voluntary trade promotes economic progress because it
a. encourages individuals to become self-sufficient. b. benefits buyers at the expense of sellers. c. makes larger outputs possible as a result of specialization. d. moves goods, services and resources from people who value them more to individuals who value them less.