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Aggregate Demand

Problems

Components of Aggregate Demand

The Aggregate Demand Curve

Problem : What are the axes of the aggregate demand curve?

The vertical axis of the aggregate demand curve is the price level. The horizontal axis of the aggregate demand curve is output or income.

Problem : What does aggregate demand represent?

Aggregate demand represents the total amount of goods and services demanded in an economy.

Problem : What is the basic equation for aggregate demand?

Y = C(Y - T) + I(r) + G + NX(e)

Problem : What does the term C(Y - T) mean in the equation for aggregate demand?

The term C(Y - T) in the equation for aggregate demand means that consumption is a function of disposable income.

Problem : What happens to net exports as the real exchange rate rises?

As the real exchange rate rises, net exports fall because domestic currency becomes relatively more valuable, thus imports increase while exports decrease.

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