Prior To Beginning Work On This Discussion, Read Chap 929525
Prior To Beginning Work On This Discussion Read Chapter 6 In The Cour
Prior to beginning work on this discussion, read Chapter 6 in the course text and respond to the following components: Discuss the reasons why the aggregate demand (AD) curve slopes downward. What causes the AD curve and aggregate supply (AS) curve to shift, respectively? How would a change in AD and AS affect the economy, respectively? Why do Keynesian economists emphasize AD whereas classical economists emphasize AS? Your initial post should be a minimum of 300 words.
Paper For Above instruction
The downward sloping nature of the aggregate demand (AD) curve is a fundamental concept in macroeconomics that reflects the inverse relationship between the price level and the quantity of goods and services demanded within an economy. This negative slope can primarily be attributed to three effects: the wealth effect, the interest rate effect, and the exchange rate effect.
Firstly, the wealth effect suggests that when the price level decreases, the real value of household wealth increases, prompting consumers to spend more, thus increasing the quantity of goods and services demanded. Conversely, a higher price level erodes the purchasing power of wealth, leading to decreased consumption. Second, the interest rate effect relates to how changes in the price level influence interest rates. A rise in the price level tends to increase the demand for money, which can push up interest rates, making borrowing more expensive and reducing investment. When the price level falls, interest rates tend to decrease, encouraging investment and consumption. Lastly, the exchange rate effect pertains to international trade. A higher domestic price level can lead to currency depreciation, making exports more expensive and imports cheaper, which reduces net exports. Conversely, a lower price level can result in currency appreciation, boosting net exports.
Shifts in both the aggregate demand (AD) and aggregate supply (AS) curves are driven by different factors. The AD curve shifts due to changes in consumer confidence, government policies, investment levels, and net exports. For instance, an increase in government spending or a surge in consumer confidence shifts AD to the right, indicating higher demand at each price level. Conversely, a decrease shifts it leftward. The AS curve shifts because of changes in resource prices, technological advancements, or productivity. An increase in productivity or a decrease in resource costs shifts AS to the right, indicating higher output at each price level.
Changes in AD and AS have distinct effects on the economy. A rightward shift in AD typically results in higher output and employment but can lead to inflationary pressures if the economy is already at or near full capacity. A leftward shift causes a decline in output and rising unemployment. On the other hand, shifts in AS influence inflation and output differently: an increase in AS lowers prices and boosts output (productivity-driven growth), whereas a decrease in AS leads to inflation and reduced output.
Keynesian economists emphasize aggregate demand because they focus on demand-side factors, especially in periods of recession or economic slack, believing that government intervention can stimulate AD to boost employment. Classical economists, however, emphasize aggregate supply, based on their belief that markets are self-correcting in the long run and that supply-side factors primarily determine economic output and price levels.
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