5. Consider the following diagram showing the AD curves in two different economies. One economy is...

Transcribed Image Text:

5. Consider the following diagram showing the AD curves in two different economies. One economy is Autarkland-it does not trade with the rest of the world (autarky is a situation in which a country does not trade with other countries). The other economy is Openland-it exports to and imports from the rest of the world. ADOPENLAND ADAUTARKLAND Y a. Explain why an increase in the domestic price level (for a given exchange rate) reduces net exports in Openland. How would you illustrate this with the AE curve in the 45°-line diagram? b. Explain why the AD curve is steeper in Autarkland than in Openland. c. If there are never any net exports in Autarkland, why isn't the AD curve vertical? Explain what other aspect of the economy generates a downward-sloping AD curve. 5. Consider the following diagram showing the AD curves in two different economies. One economy is Autarkland-it does not trade with the rest of the world (autarky is a situation in which a country does not trade with other countries). The other economy is Openland-it exports to and imports from the rest of the world. ADOPENLAND ADAUTARKLAND Y a. Explain why an increase in the domestic price level (for a given exchange rate) reduces net exports in Openland. How would you illustrate this with the AE curve in the 45°-line diagram? b. Explain why the AD curve is steeper in Autarkland than in Openland. c. If there are never any net exports in Autarkland, why isn't the AD curve vertical? Explain what other aspect of the economy generates a downward-sloping AD curve.

Answer rating: 100% (QA)

5 a Increase in domestic price level increases the overall price of the product and make it more exp... View the full answer