BAKRIE UNIVERSITY INDIVIDUAL ASSIGNMENT 1 MACROECONOMICS

ECONOMICS FOR BUSINESS

Wednesday June 21 2023

1. Do it by yourself, no discussions with other people, other students, or other classmates.

2. Answer all questions in detail and clearly to get higer score
3. show graphs completely and clearly.
4. support your answer by using curves.
5. Submit your answers to my email: uhsyah21@gmail.com the latest is on Tuesday June 27
2023 at 21:00

QUESTION:

1. (100 marks), What would happen to the Aggregate demand (AD) Curve if the Price level (PL)
decreased? Show the graph and explain.

When the price level (PL) decreases, it leads to a movement along the aggregate demand (AD) curve.

The aggregate demand (AD) curve represents the relationship between the price level and the
aggregate quantity of goods and services demanded in an economy, assuming all other factors remain
constant. It slopes downward due to three main components: the wealth effect, the interest rate
effect, and the international trade effect.

When the price level decreases, it means that the overall price level of goods and services in the
economy has fallen. This decline in the price level influences various factors, leading to changes in
aggregate demand.

Graphically, a decrease in the price level would result in a movement along the AD curve to a new
point on the curve. The AD curve itself does not shift; instead, there is a change in the quantity of
goods and services demanded at each price level.

AD
Ad0
PL0 Movement Along AD
Curve to new point
Price level
decreased
Ad1
PL1

Q0 Q1

Quantity
Increase
There are effects of a decrease in the price level on aggregate demand:

1. Wealth Effect: When the price level decreases, people's real purchasing power increases. This
means that their wealth has effectively increased, allowing them to buy more goods and
services. As a result, consumption spending increases, leading to an increase in aggregate
demand.
2. Interest Rate Effect: A decrease in the price level also affects interest rates. When prices fall,
individuals and businesses require less money to finance their activities. As a result, the demand
for loans decreases, leading to lower interest rates. Lower interest rates encourage borrowing
and investment, which in turn stimulates aggregate demand.
3. International Trade Effect: A decrease in the price level makes domestic goods and services
relatively cheaper compared to foreign goods. This leads to an increase in exports and a
decrease in imports. As a result, net exports (exports minus imports) increase, boosting
aggregate demand.

Combining these effects, a decrease in the price level leads to an increase in aggregate demand. This
is represented by a movement along the AD curve to a new equilibrium point with a higher quantity
of goods and services demanded.

In summary, a decrease in the price level results in a movement along the aggregate demand curve,
leading to an increase in aggregate demand due to the wealth effect, interest rate effect, and
international trade effect.