Aggregate demand

Question 1

Assuming the economy is in an initial equilibrium at X, identify where the new equilibrium will be, if:

Fiscal policy

  1. There is an increase in the money supply through additional quantitative easing.
  2. There is a rise in the base interest rate.
  3. There is a drop in the economy’s level of saving.
  4. Imports rise at a greater rate than exports.
  5. Unemployment increases.

Question 2

  1. Why does the AD curve slope downwards?
  2. Carefully explain how a change in interest rates is transmitted to the real economy.
  3. Carefully explain how a fall in the value of a country’s currency is transmitted to the real economy.