Exhibit 5-3
-In Exhibit 5-3 AD₁ and AS₁ represent the initial aggregate demand and aggregate supply.The initial equilibrium is at point A.Suppose that the price level in Europe falls,what will the new equilibrium be?

Question

Exhibit 5-3

-In Exhibit 5-3 AD₁ and AS₁ represent the initial aggregate demand and aggregate supply.The initial equilibrium is at point A.Suppose that the price level in Europe falls,what will the new equilibrium be?

Quizplus · Accepted Answer

A fall in the price level in Europe will make European goods cheaper relative to domestic goods, leading to an increase in imports and a decrease in exports. This will shift the aggregate demand curve to the left, to AD2. The new equilibrium will be at point B, with a lower price level (P2) and a lower level of GDP (GDP1).

Exhibit 5-3 -In Exhibit 5-3 AD1 and AS1 Represent the Initial Aggregate

Exhibit 5-3 -In Exhibit 5-3 AD₁ and AS₁ Represent the Initial Aggregate