Aggregate Demand - Why AD Curve Slope Downwards

10 important questions on Aggregate Demand - Why AD Curve Slope Downwards

What does the Keynesian model assume about output in the short-run?

In the short-run, output adjusts to match demand when prices are preset.

What are "preset prices" in the Keynesian model?

Prices that remain fixed temporarily due to contracts, menu costs, or slow market adjustments.

How do output and prices behave in the Keynesian model?

Output changes more quickly than prices, as the model focuses on short-run adjustments.
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What aspect of inflation does the Keynesian model not explain?

The model does not explain how inflation behaves in the economic context.

What do central banks do when inflation rises?

To slow the economy, central banks often raise interest rates.

How does higher borrowing costs affect households and businesses?

Households spend less and businesses delay investments due to higher borrowing costs.

Who is most affected by inflation in terms of purchasing power?

Low-income households experience reduced purchasing power when inflation reduces their income.

What happens to overall demand when households have less money to spend?

Overall demand in the economy fails with less money to spend.

How do unstable prices affect consumer behavior?

Uncertainty from unstable prices leads consumers to delay major purchases.

What impact does inflation have on exports?

Inflation makes domestic goods more expensive, lowering exports and reducing total demand.

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