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Chapter 12: Macroeconomics (page 428)

How does aggregate demand effect economic growth?

Short Answer

Expert verified

An increase or decrease in the components of aggregate demand will have an effect on economic growth.

Step by step solution

01

Aggregate Demand

if there is an increase in the components of aggregate demand such as higher consumption levels, more investments of firms in projects, more government spendings on infrastructure, or increased exports in trade, then there will be increased economic growth. Conversely, a decrease in these components will lead to a decrease in aggregate demand and hence a fall in economic growth.

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Most popular questions from this chapter

A rise in productivity increases potential output, but some worry that demand for the additional output will be insufficient even in the long run. How would you respond?

Suppose someone says, 鈥淯sing monetary or fiscal policy to pump up the economy is counterproductive 鈥攜ou get a brief high, but then you have the pain of inflation.鈥�

a. Explain what this means in terms of the AD-AS model.

b. Is this a valid argument against stabilization policy? Why or why not?

Determine the effect on short-run aggregate supply for each of the following events. Explain whether it represents a movement along the SRAS curve or a shift of the SRAS curve.

a. A rise in the consumer price index (CPI) leads producers to increase output.

b. A fall in the price of oil leads producers to increase output.

c. A rise in legally mandated retirement benefits paid to workers leads producers to reduce output.

Describe the short-run effects of each of the following shocks on the aggregate price level and on aggregate output.

a. The government sharply increases the minimum wage, raising the wages of many workers.

b. Solar energy firms launch a major program of investment spending.

c. Congress raises taxes and cuts spending.

d. Severe weather destroys crops around the world.

Determine the effect on aggregate demand of each of the following events. Explain whether it represents a movement along the aggregate demand curve (up or down) or a shift of the curve (leftward or rightward).

a. A rise in the interest rate caused by a change in monetary policy

b. A fall in the real value of money in the economy due to a higher aggregate price level

c. News of a worse-than-expected job market next year

d. A fall in tax rates

e. A rise in the real value of assets in the economy due to a lower aggregate price level

f. A rise in the real value of assets in the economy due to a surge in real estate values
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