The aggregate demand and aggregate supply model is a useful simplification of the macroeconomy used to explain short-run fluctuations in economic activity around its long-run trend.

The horizontal axis of a diagram of the aggregate demand and aggregate supply curves measures which of the following?

1. The price of a particular representative good produced in the economy

2. The amount of a particular representative good produced in the economy

3. An economy’s real GDP

4. An economy’s price level

Which of the following are reasons that the aggregate demand curve slopes downward? Check all that apply.

1. As the price level rises, imports become relatively cheaper than domestically produced goods.

2. As the price level rises, households’ real wealth decreases.

3. As the price level rises, households’ real income increases.

QUESTION 1:

The horizontal axis measures an economy's real GDP- 3

QUESTION 2:

As price level rises, imports become relatively cheaper than domestically produced goods- 1

Explanation:

QUESTION 1

The horizontal axis of the aggregate demand and aggregate supply measures an economy's real GDP. The GDP is the sum of all the final goods and services produced in the economy while the vertical axis of an aggregate supply and aggregate demand diagram measures the price index level.

QUESTION 2

When domestic interest rate is low compared to foreign interest rates, domestic investors invest in foreign countries where return on investments is higher. Increased outflow of currency to foreign countries, causes a decrease in real exchange rate. This decrease, increases net exports. This then, increases aggregate demand. As the price level drops, interest rates fall, investment in foreign countries becomes increased, real exchange rate falls, net exports increases and the aggregate demand then increases.

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