Answer to Question #16182 in Economics of Enterprise for a n m

Question

Give three reasons why the AD curve is downward sloping.
Why is the AS curve upward sloping (at least in the short run)?

Answer 1

Three reasons of the AD curve downward sloping are:
Real wealth effect, more commonly known as the "Pigou effect" suggests that when the price level increases the actual wealth of the population falls, which leads to a reduction in consumer spending. Thus, the aggregate demand falls, and with it the level of output.The effect of the interest rate - an increase in the price level in the economy apparently leads to growing demand for cash. The increase in the demand for money, in turn, stimulates increases in real interest rates.The effect of foreign purchases - "Mundell-Fleming effect": by increasing of the price level export of the country falls: goods and services are more expensive, and imported goods - relatively cheaper for people. Thus imports into the country increases and exports from it falls . This implies that the value of net exports is decreased, and this suggests that the volume of total output falls
There are four major models that explain why the short-term aggregate supply curve slopes
upward:
the sticky-wage model - When the price level rises, real wages fall. When real wages fall, labor becomes cheaper. When labor becomes
cheaper, firms hire more labor. When firms hire more labor, output increases. .
the worker-misperception model - When the price level rises, firms increase nominal wages. When nominal wages increase, workers--due
to misperceptions--believe that real wages also increase. When workers believe
that real wages increase, workers provide more labor. When workers provide more
labor, output increases. .
the imperfect-information model - When the overall price level rises, producers mistake it for a relative increase in the price level.
When the relative price level rises, the real wage earned by producers rises.
When the real wage earned by producers rises, the amount of labor supplied by
producers increases. When the amount of labor supplied by producers increases,
output increases. .
the sticky- price model - when firms expect a high price level they set their relatively sticky prices high. Other firms follow suit and
set their prices high as well. Thus, a high expected price level leads to a high
actual price level. When the expected price level is high, producers produce
more output. .