Question

The slope of the AD curve:

(a) Why does the AD curve slope downward?
(b) If the AD curve were more steeply sloped, how would the economy respond differently to aggregate demand shocks (shocks to a¯ )?
(c) If the curve were more steeply sloped, how would the economy respond differently to aggregate supply shocks (shocks to o¯ )?
(d) What kind of economic changes in the economy would lead the curve to be more steeply sloped?

Answer 1

Answer: the answer is below

Explanation:

a) the central bank raises interest rate and slow dow economy when inflation raises

b) note that a is an x-intercept. Under a steeper AD curve, a shock to a has a greater effect on output and inflation.

c) Under a steeper AD curve, a shock to o creates a smaller swing in output, but a bigger swing in inflation.

d) A Fed that doesnt care much about inflation causes AD to be steeper. Also if investment responds only weakly to shifts in interest rates, or if the consumption and investment multipliers get smaller, then AD gets steeper