Problem 3 Graphically portray (a) a change... [FREE SOLUTION]

Chapter 8: Problem 3

Graphically portray (a) a change in the quantity demanded of Real GDP and (b) a change in aggregate demand.

Short Answer

Expert verified

Graphically, (a) a change in the Quantity Demanded of Real GDP is depicted as movement along the stable Aggregate Demand (AD) curve. Increased demand causes downward/rightward movement while decreased demand results in upward/leftward movement along the AD curve. (b) A change in Aggregate Demand represents a shift in the entire AD curve, either to the right (for increased demand) or to the left (for decreased demand).

Step by step solution

Plotting Change in quantity Demanded of Real GDP

The Quantity Demanded of Real GDP (Gross Domestic Product) is depicted on the horizontal (x) axis of the graph whereas the Price Level is shown on the vertical (y) axis. When there is a change in the Quantity Demanded of Real GDP, it is represented as a movement along the aggregate demand curve. For instance, due to an increase in the quantity demanded, there would be a downward movement along the curve, shifting rightwards towards the x-axis. Similarly, for a decrease in quantity demanded, there would be an upwards movement along the curve, shifting leftwards.

Plotting Change in Aggregate Demand

A change in Aggregate Demand (AD) represents a shift in the AD curve itself, either to the left or right side rather than just a movement along the curve. For example, if there is an increase in aggregate demand, the entire AD curve will shift to the right. Conversely, a decrease in aggregate demand would shift the AD curve leftwards. This is an important distinction because, in contrast to only changes in quantity demanded where there is simply a movement along a stable curve, changes in aggregate demand show a shift in the overall curve.

Graphical Representation

Now draw the graph with price level as the vertical axis and quantity of Real GDP as the horizontal axis. Now plot aggregate demand curve as a downward sloping line. For illustrating the change in quantity of Real GDP, show movement along the aggregate demand curve upwards or downwards. For demonstrating the change in aggregate demand, exhibit a shift of the entire curve to the right or left.