b) aggregate demand curve

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5 Terms

1
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  • components of an AD curve

  • y-axis = average price level

  • x-axis = real GDP

  • gradient = aggregate demand, constant and negative

2
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  • three reasons why the gradient of the AD curve is negative

  • interest rate effect

  • income effect

  • exchange rate affect

3
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  • how the interest rate effect causes a negative gradient

  • higher AP

  • higher interest rate

  • less investment and less consumption (incentive to save)

  • lower real GDP

4
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  • how the income effect causes a negative gradient

  • higher AP

  • less purchasing power

  • less consumption

  • lower GDP

5
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  • how the exchange rate effect causes a negative gradient

  • higher AP

  • higher interest rate

  • higher exchange rate

  • less attractive goods and services to foreign firms

  • less exports

  • lower real GDP