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Chapter 12: Q1. (page 259)

Which of the following help to explain why the aggregate demand curve slopes downward?

  1. When the domestic price level rises, our goods and services become more expensive to foreigners.

  2. When government spending rises, the price level falls.

  3. There is an inverse relationship between consumer expectations and personal taxes.

  4. When the price level rises, the real value of financial assets (like stocks, bonds, and savings account balances) declines.

Short Answer

Expert verified

Option (a) and (d) explain a downward sloping aggregate demand curve.

Step by step solution

01

Explanation for the correct options

An increase in the domestic price level makes domestic products expensive for foreigners.The costly products reduce the domestic country鈥檚 net exports. A fall in net exports reduces the aggregate demand. Thus, at a higher price level, aggregate demand decreases, and the curve slopes downward.

When the price level rises, the value of financial assets decline. The decline in the value of financial assets reduces the purchasing power of the assets. So the demand for financial assets or the investment declines, and the aggregate demand curve slopes downward.

02

Explanation for the incorrect options

As government spending increases, it increases the aggregate demand equally at all levels of income. Therefore, the AD curve shifts upward.

The inverse relationship between consumer expectations and personal taxes results in the aggregate demand curve shift because taxes change consumption equally at all income levels in the opposite direction. They do not explain the slope of the curve.

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Most popular questions from this chapter

Suppose that the table presented below shows an economy鈥檚 relationship between real output and the inputs needed to produce that output:

Input QuantityReal GDP
150.0\(400
112.5300
75.0200

  1. What is productivity in this economy?

  2. What is the per-unit cost of production if the price of each input unit is \)2?

  3. Assume that the input price increases from \(2 to \)3 with no accompanying change in productivity. What is the new per-unit cost of production? In what direction would the $1 increase in input price push the economy鈥檚 aggregate supply curve? What effect would this shift of aggregate supply have on the price level and the level of real output?

  4. Suppose that the increase in input price does not occur but, instead, that productivity increases by 100 percent. What would be the new per-unit cost of production? What effect would this change in per-unit production cost have on the economy鈥檚 aggregate supply curve? What effect would this shift of aggregate supply have on the price level and the level of real output?

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 LevelReal GDPPrice LevelReal GDPPrice LevelReal GDP
110275100200110225
100250100225100225
9522510025095225
9020010027590225
  1. What must be the current amount of real output demanded at the 100 price level?
  2. If the amount of output demanded declined by \)25 at the 100 price level shown in B, what would be the new equilibrium real GDP? In business cycle terminology, what would economists call this change in real GDP?

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run?

  1. An increase in aggregate demand.

  2. A decrease in aggregate supply, with no change in aggregate demand.

  3. Equal increases in aggregate demand and aggregate supply.

  4. A decrease in aggregate demand.

  5. An increase in aggregate demand that exceeds an increase in aggregate supply.

Distinguish between "real-balances effect" and "wealth effect," as the terms are used in this chapter. How does each relate to the aggregate demand curve?

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? In each case, use a diagram to show the expected effects on the equilibrium price level and the level of real output, assuming that the price level is flexible both upward and downward.

  1. A widespread fear by consumers of an impending economic depression.

  2. A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output.

  3. A reduction in interest rates.

  4. A major increase in spending for health care by the federal government.

  5. The general expectation of coming rapid inflation.

  6. The complete disintegration of OPEC, causing oil prices to fall by one-half.

  7. A 10 percent across-the-board reduction in personal income tax rates.

  8. A sizable increase in labor productivity (with no change in nominal wages).

  9. A 12 percent increase in nominal wages (with no change in productivity).

  10. An increase in exports that exceeds an increase in imports (not due to tariffs).
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