Along the aggregate demand curve, as the pirice level rises from .5 to 1.5, the

Question

Along the aggregate demand curve, as the pirice level rises from .5 to 1.5, the quantity of real output demanded declines from 3,000 billion to 2,000 billion. What happens to the aggregate quantity demandedin nominal terms over this interval? Using the formula for price elasticity of demand (the ratio of the percentage change in the quantity of a good demanded to a given percentage change in its price), what is the elasticity of aggregate demand over this interval?

A change in price level causes a movement along a given aggregate demand curve. Other things being equal. A change in economic conditions other than the price level can

Explanation / Answer

Ep= the ratio of the percentage change in the quantity of a good demanded to a given percentage change in its price.

now the percentage change in the quantity of a good demanded=[(Q2-Q1)*100]/Q1=[(2,000-3,000)*100]/3,000= -33.3%

and percentage change in its price= [(P2-P1)*100]/P1=[(1.5-.5)*100]/.5=200% SO Ep= -33.33/200=0.166

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