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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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What shifts the aggregate demand curve?
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?
Explain: 鈥淯nemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply.鈥� In each case, specify the price-level outcomes.
Label each of the following descriptions as being either an immediate-short-run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregate supply curve.
A vertical line.
The price level is fixed.
Output prices are flexible, but input prices are fixed.
A horizontal line.
An upsloping curve.
Output is fixed.
At the current price level, producers supply \(375 billion of final goods and services while consumers purchase \)355 billion of final goods and services. The price level is:
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