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Which of the following is true about the aggregate demand curve in the short run; Choose the correct option:
- a)Aggregate Demand curve starts from the origin
- b)Aggregate Demand curve makes a positive intercept with the X-axis
- c)Aggregate Demand curve makes a positive intercept with the Y-axis.
- d)Aggregate Demand curve makes a negative intercept on the Y-axis.
Correct answer is option 'C'. Can you explain this answer?
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Which of the following is true about the aggregate demand curve in the...
Aggregate Demand Curve in the Short Run
In macroeconomics, the aggregate demand curve represents the total demand for goods and services in an economy at different price levels. It shows the relationship between the overall level of prices and the total quantity of goods and services demanded in an economy.
Intercept on X-axis
The X-axis on an aggregate demand curve represents the level of real output or real GDP. In the short run, the aggregate demand curve does not start from the origin. This is because even at a price level of zero, there is still some level of demand for goods and services due to factors such as government spending, consumer confidence, and investment. Therefore, option 'a' is not correct.
Intercept on Y-axis
The Y-axis on an aggregate demand curve represents the overall price level. In the short run, the aggregate demand curve does make a positive intercept with the Y-axis. This means that even at a zero level of real output, there is still some level of demand for goods and services due to factors such as government spending, consumer confidence, and investment. The positive intercept on the Y-axis indicates that there is a certain level of aggregate demand even when there is no output. Therefore, option 'c' is correct.
Explanation
In the short run, the aggregate demand curve is upward sloping, indicating that as the price level increases, the quantity of goods and services demanded also increases. This can be explained by several factors such as the wealth effect, interest rate effect, and exchange rate effect.
- Wealth Effect: As the price level decreases, the real value of money increases, leading to an increase in consumer purchasing power. This, in turn, leads to higher levels of consumption and aggregate demand.
- Interest Rate Effect: A decrease in the price level reduces the demand for money, which leads to lower interest rates. Lower interest rates encourage investment and borrowing, which increases aggregate demand.
- Exchange Rate Effect: When the domestic price level decreases, the domestic currency becomes relatively cheaper compared to foreign currencies. This leads to an increase in exports and a decrease in imports, resulting in higher aggregate demand.
Overall, the positive intercept on the Y-axis of the aggregate demand curve in the short run indicates that there is a certain level of demand for goods and services even when there is no output. This is due to various factors that influence aggregate demand, such as government spending, consumer confidence, and investment.
In macroeconomics, the aggregate demand curve represents the total demand for goods and services in an economy at different price levels. It shows the relationship between the overall level of prices and the total quantity of goods and services demanded in an economy.
Intercept on X-axis
The X-axis on an aggregate demand curve represents the level of real output or real GDP. In the short run, the aggregate demand curve does not start from the origin. This is because even at a price level of zero, there is still some level of demand for goods and services due to factors such as government spending, consumer confidence, and investment. Therefore, option 'a' is not correct.
Intercept on Y-axis
The Y-axis on an aggregate demand curve represents the overall price level. In the short run, the aggregate demand curve does make a positive intercept with the Y-axis. This means that even at a zero level of real output, there is still some level of demand for goods and services due to factors such as government spending, consumer confidence, and investment. The positive intercept on the Y-axis indicates that there is a certain level of aggregate demand even when there is no output. Therefore, option 'c' is correct.
Explanation
In the short run, the aggregate demand curve is upward sloping, indicating that as the price level increases, the quantity of goods and services demanded also increases. This can be explained by several factors such as the wealth effect, interest rate effect, and exchange rate effect.
- Wealth Effect: As the price level decreases, the real value of money increases, leading to an increase in consumer purchasing power. This, in turn, leads to higher levels of consumption and aggregate demand.
- Interest Rate Effect: A decrease in the price level reduces the demand for money, which leads to lower interest rates. Lower interest rates encourage investment and borrowing, which increases aggregate demand.
- Exchange Rate Effect: When the domestic price level decreases, the domestic currency becomes relatively cheaper compared to foreign currencies. This leads to an increase in exports and a decrease in imports, resulting in higher aggregate demand.
Overall, the positive intercept on the Y-axis of the aggregate demand curve in the short run indicates that there is a certain level of demand for goods and services even when there is no output. This is due to various factors that influence aggregate demand, such as government spending, consumer confidence, and investment.
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Which of the following is true about the aggregate demand curve in the...
The curve intercepts on Y-axis because even at zero level of income, there is some consumption which is required for the very existence of life.
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