MacroEcon Chapter 13.1

Why the Aggregate Demand Curve Is Downward Sloping

The aggregate demand curve slopes downward because a higher price level: Reduces the real value of household wealth, which decreases consumption Raises interest rates, which decreases investment and consumption Makes U.S. exports more expensive and foreign imports less expensive, which decreases net exports

aggregate demand curve is downward sloping because

a fall in the price level increases the quantity of real GDP demanded

^ consumption will shift the aggregate demand curve to the_____ households become more pessimistic about their future incomes, the aggregate demand curve will shift to the_______

right left

If any variable other than the price level changes then...

the aggregate demand curve will shift

What are the Variables That Shift the Aggregate Demand Curve?

1. Changes in government policies 2. Changes in the expectations of households and firms 3. Changes in foreign variables

Which of the following factors does not cause the aggregate demand curve to​ shift? A. a change in the price level B. a change in government monetary or fiscal policies C. a change in foreign variables D. a change in the expectations of households and firms

A. a change in the price level

The interest rate effect refers to the fact that a higher price level results in A. higher interest rates and lower investment. B. higher interest rates and higher investment. C. lower interest rates and lower investment. D. lower interest rates and higher investment.

A. higher interest rates and lower investment.

The federal government decreases taxes. This causes a A. shift of the aggregate demand curve. Your answer is correct. B. movement along the aggregate demand curve.

A. shift of the aggregate demand curve. Your answer is correct.

The price level in the United States rises. This causes a A. shift of the aggregate demand curve. Your answer is not correct. B. movement along the aggregate demand curve.

B. movement along the aggregate demand curve.

The aggregate demand curve slopes downward for all of the following reasons​ except: A. A lower price level increases the real wealth of​ households, thereby increasing household consumption. B. A lower price level makes U.S. exports less​ expensive, thereby increasing net exports. C. A lower price level makes imports from other countries less​ expensive, and U.S. citizens buy more imports. D. A lower price level decreases the rate of​ interest, which increases private investment and consumption.

C. A lower price level makes imports from other countries less​ expensive, and U.S. citizens buy more imports.

Wall Street Journal​ wrote, "A strong dollar and weak growth overseas portend downward pressure on U.S.​ exports." ​Source: Jon​ Hilsenrath, "Rising Dollar and Falling Oil Could Be Recipe For a U.S. Asset​ Boom," Wall Street Journal​, December​ 11, 2014. A​ "strong dollar" means that the A. U.S. dollar exchanges for fewer units of foreign currencies. B. U.S. money supply is increasing. C. U.S. dollar exchanges for more units of foreign currencies. D. U.S. economy is strong.

C. U.S. dollar exchanges for more units of foreign currencies.

From August 2009 to May​ 2017, the Standard​ & Poor's Index of 500 stock prices increased by more than 135​ percent, while the consumer price index increased by less than 15 percent. These changes would have caused A. an increase in the real value of household​ wealth, which shifted the aggregate demand curve to the left. B. an increase in the real value of household​ wealth, which shifted the aggregate demand curve to the right. C. a decrease in the real value of household​ wealth, which shifted the aggregate demand curve to the right. D. a decrease in the real value of household​ wealth, which shifted the aggregate demand curve to the left.

C. a decrease in the real value of household​ wealth, which shifted the aggregate demand curve to the right.

Increases in the growth rate of domestic GDP compared to the growth rate of foreign GDP will make the aggregate demand curve shift to the_______

Left

The actions the Federal Reserve takes to manage the money supply and interest rates to achieve macroeconomic policy objectives.

Monetary policy

Interest-Rate Effect

A higher price level will increase the interest rate and reduce investment spending, thereby reducing the quantity of goods and services demanded. A lower price level will decrease the interest rate and increase investment spending, thereby increasing the quantity of goods and services demanded.

Milovia is a small open economy. The general price level in the economy has been increasing at a rate of about 7.5 percent each year. Jane​ Wilson, an industry​ analyst, is of the opinion that such high inflation is adversely affecting aggregate demand in the economy and therefore its ability to grow. Her​ colleague, Harry​ Gomes, however, disagrees. According to​ Harry, some amount of inflation is unavoidable in a growing economy. Higher prices for products help to increase the level of corporate profits and induce firms to increase aggregate output. Which of the​ following, if​ true, will indicate that higher prices will not induce firms to increase​ output? A. The increase in the price of inputs outweighed the increase in the price of the final product. B. In spite of rising​ inflation, people in Milovia expect real incomes to increase substantially in the next few years. C. The​ country's trade balance has been positive for the last five years. D. The government purchased bonds in an open market operation last year. E. The Milovian government offers subsidies on inputs used in many manufacturing industries.

A. The increase in the price of inputs outweighed the increase in the price of the final product.

The combination of a strong U.S. dollar and weak growth overseas might result in lower U.S. exports because A. U.S. exports become more expensive for foreign buyers while​ income, and purchasing​ power, in other countries is rising only slowly. B. U.S. exports become less expensive for foreign buyers while​ income, and purchasing​ power, in other countries is rising only slowly. C. U.S. exports become less expensive for foreign buyers while​ income, and purchasing​ power, in other countries is falling.

A. U.S. exports become more expensive for foreign buyers while​ income, and purchasing​ power, in other countries is rising only slowly.

The result of a strong dollar will be A. a leftward shift of the U.S. aggregate demand curve because it reduces​ exports, a spending component of aggregate demand. B. a rightward shift of the U.S. aggregate demand curve because it reduces​ exports, a spending component of aggregate demand. C. an upward movement along the U.S. aggregate demand curve because the price level will rise as fewer exports are sold. D. a downward movement along the U.S. aggregate demand curve because the price level will fall as fewer exports are sold.

A. a leftward shift of the U.S. aggregate demand curve because it reduces​ exports, a spending component of aggregate demand.

​"Weak growth​ overseas" means that A. foreign economies are growing more slowly than the U.S. economy. B. foreign inflation is growing more slowly than U.S. inflation. C. the foreign money supply is growing more slowly than the U.S. money supply. D. foreign investment is growing more slowly than U.S. investment.

A. foreign economies are growing more slowly than the U.S. economy.

If the price level​ increases, then A. there will be a movement up along a stationary aggregate demand curve. B. the aggregate demand curve will shift to the right. C. the aggregate demand curve will shift to the left. D. none of the above will occur.

A. there will be a movement up along a stationary aggregate demand curve.

Which of the following statements is correct if real GDP in the United States declined by more during the 2007minus2009 recession than did real GDP in​ Canada, China, and other trading partners of the United​ States? A. Imports to the United States fell more than the U.S.​ exports, leading to a decrease in net exports. B. Imports to the United States fell more than the U.S.​ exports, leading to an increase in net exports. C. U.S. exports fell more than the​ imports, leading to an increase in net exports. D. U.S. exports fell more than the​ imports, leading to a fall in net exports.

B. Imports to the United States fell more than the U.S.​ exports, leading to an increase in net exports.

The​ international-trade effect refers to the fact that an increase in the price level will result in A. an increase in exports and an increase in imports. B. a decrease in exports and an increase in imports. C. an increase in exports and a decrease in imports. D. a decrease in exports and a decrease in imports.

B. a decrease in exports and an increase in imports.

How can government policies shift the aggregate demand curve to the​ right? A. by increasing personal income taxes B. by increasing government purchases C. by increasing business taxes D. All of the above.

B. by increasing government purchases

An economics student makes the following​ statement: ​"It's easy to understand why the aggregate demand curve is downward​ sloping: When the price level​ increases, consumers substitute into less expensive​ products, thereby decreasing total spending in the​ economy." This statement is false because the aggregate demand curve is A. downward sloping for the same reasons as a demand curve for a single product. B. downward sloping because as prices​ rise, consumer real wealth​ declines, interest rates​ rise, and exports become more expensive. C. upward sloping for the same reasons as a demand curve for a single product. D. upward sloping because as prices​ rise, consumer wealth​ increases, interest rates​ fall, and exports become more expensive.

B. downward sloping because as prices​ rise, consumer real wealth​ declines, interest rates​ rise, and exports become more expensive.

The value of the U.S. dollar increases. This causes a A. movement along the aggregate demand curve. B. shift of the aggregate demand curve

B. shift of the aggregate demand curve

What relationship is shown by the aggregate demand​ curve? The aggregate demand curve shows the relationship between A. the price level and the quantity of real GDP produced by firms. B. the price level and the quantity of real GDP demanded by​ households, firms, and the government. C. the price level and the quantity of real GDP demanded by consumers. D. the price level and the quantity of real GDP demanded by the private​ sector: households and firms.

B. the price level and the quantity of real GDP demanded by​ households, firms, and the government.

What relationship is shown by the aggregate supply​ curve? The short run aggregate supply curve shows the relationship in the short run between A. the price level and the quantity of capital​ goods: machines, factories and​ buildings, demanded by firms and households. B. the price level and the quantity of real GDP demanded by​ households, firms and the government. C. the price level and the quantity of real GDP supplied by firms. D. the price level and the quantity of real GDP demanded by firms.

C. the price level and the quantity of real GDP supplied by firms.

The wealth effect refers to the fact that A. when the price level​ falls, the nominal value of assets​ rises, while the real value of assets remains the same. B. when income​ rises, consumption rises. C. when the price level​ falls, the real value of household wealth​ rises, and so will consumption. D. All of the above.

C. when the price level​ falls, the real value of household wealth​ rises, and so will consumption.

Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

Fiscal policy ^ in government purchases shifts the aggregate demand curve to the right, and a decrease in government purchases shifts the aggregate demand curve to the left. An increase in personal income taxes reduces the amount of spendable income available to households, which reduces consumption spending and shifts the aggregate demand curve to the left. A decrease in personal income taxes shifts the aggregate demand curve to the right. An increase in business taxes reduces the profitability of investment spending and shifts the aggregate demand curve to the left. A decrease in business taxes shifts the aggregate demand curve to the right.

A curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms.

Short-run aggregate supply (SRAS) curve

A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government.

government.Aggregate demand (AD) curve

Changes in Foreign Variables

increase in net exports at every price level will shift the aggregate demand curve to the right. A change in net exports that results from a change in the price level in the United States will result in a movement along the aggregate demand curve, not a shift of the aggregate demand curve.

aggregate demand curve tells us the relationship between

the price level and the quantity of real GDP demanded,