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Chapter 12: Aggregate Demand Curve (page 239)
What is the wealth effect?
Price level decrease will influence spending decisions of households.
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Refer to the data in the table that accompanies problem 2. Suppose that the present equilibrium price level and level of real GDP are 100 and \(225, and that data set B represents the relevant aggregate supply schedule for the economy.
| (A) | (B) | (C) | |||
| Price Level | Real GDP | Price Level | Real GDP | Price Level | Real GDP |
| 110 | 275 | 100 | 200 | 110 | 225 |
| 100 | 250 | 100 | 225 | 100 | 225 |
| 95 | 225 | 100 | 250 | 95 | 225 |
| 90 | 200 | 100 | 275 | 90 | 225 |
Answer the following questions on the basis of the following three sets of data for the country of North Vaudeville:
| (A) | (B) | (C) | |||
| Price Level | Real GDP | Price Level | Real GDP | Price Level | Real GDP |
| 110 | 275 | 100 | 200 | 110 | 225 |
| 100 | 250 | 100 | 225 | 100 | 225 |
| 95 | 225 | 100 | 250 | 95 | 225 |
| 90 | 200 | 100 | 275 | 90 | 225 |
Which set of data illustrates aggregate supply in the immediate short-run in North Vaudeville? The short-run? The long run?
Assuming no change in hours of work, if real output per hour of work increases by 10 percent, what will be the new levels of real GDP in the right column of A? Do the new data reflect an increase in aggregate supply or do they indicate a decrease in aggregate supply?
Which of the following help to explain why the aggregate demand curve slopes downward?
When the domestic price level rises, our goods and services become more expensive to foreigners.
When government spending rises, the price level falls.
There is an inverse relationship between consumer expectations and personal taxes.
When the price level rises, the real value of financial assets (like stocks, bonds, and savings account balances) declines.
Suppose that consumer spending initially rises by \(5 billion for every 1 percent rise in household wealth and that investment spending initially rises by \)20 billion for every 1 percentage point fall in the real interest rate. Also, assume that the economy鈥檚 multiplier is 4. If household wealth falls by 5 percent because of declining house values, and the real interest rate falls by 2 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? In what direction and by how much will it eventually shift?
Why is the aggregate demand curve downsloping? Specify how your explanation differs from the explanation for the downsloping demand curve for a single product. What role does the multiplier play in shifts of the aggregate demand curve?
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