AP Macro: Edge Ex: Aggregate Demand

As price level increases, people's wealth has less purchasing power.

Decrease in Quantity of Aggregate Demand caused by the Real Balances Effect

Which of the following statements best exemplifies the concept of structural unemployment?

Workers are fired because their skills are no longer in demand. correct

An increase in which of the following will increase aggregate demand?

Government Spending

Assume the government feels the economy is "overheated" and would like to see aggregate demand decrease by $200 billion. By how much would the government need to change government spending if the marginal propensity to save in the economy is .25?

$50 billion decrease (The correct answer is a $50 Billion decrease. Since the marginal propensity to save is .25, the multiplier is = 4, or (1/.25). If government decreases government spending by $50 Billion, then Aggregate Demand will decrease by 4 times or by $200 Billion)

Assume consumers have a new bright and positive attitude about the economy and they increase spending on consumer goods by a total of $400 billion. As a result, aggregate demand ultimately increases by approximately $1.6 trillion. Assuming the marginal propensity to consume for the economy is .75, by what amount did the consumers initially change their saving?

-400 billion (The answer is -$400 billion. Consumers have two choices concerning what they can do with their income. They can either spend it or save it. Once again, that is why the sum of the marginal propensity to save plus the marginal propensity to consume is equal to 1. Therefore, if the consumers decide to increase their spending by $400 billion, then they must reduce their saving by $400 billion.)

Assume the government increases government spending by $800 billion and the ultimate change in aggregate demand is approximately $4 trillion, then the economy's marginal propensity to consume must be:

.8 (The correct answer is .8. If the increase in government spending of $800 billion results in an increase in aggregate demand of $4 trillion, that is a fivefold increase meaning the multiplier is 5. For the multiplier to be equal to 5, then the marginal propensity to consume must be .8. The multiplier would be calculated as (1/1-.8) which is equal to 5.)

The value of which of the following is counted in the United States gross domestic product?

A car produced in the United States and sold in Europe

Economic growth is best defined as:

A sustained increase in real gross domestic product per capita

As price level increases, people need more money to buy goods and services.

Decrease in Quantity of Aggregate Demand caused by the Interest Rate Effect

Which of the following changes would cause an economy's Aggregate Demand curve to shift to the right?

An increase in autonomous consumption spending

An increase in the international value of the United States dollar will tend to cause U. S. exports to:

Fall and aggregate demand to decrease. correct

Which of the following would cause the aggregate demand curve to shift to the left?

Higher value of the dollar on the foreign exchange market

As price level decreases, domestic goods appear to be more affordable to foreign buyers.

Increase in Quantity of Aggregate Demand caused by the Foreign Purchases Effect

If a worker's nominal wage rate increases from $10 to $12 per hour and at the same time the general price level increases by 10 percent, the worker's real wage has approximately:

Increased by 10%

As a result of a higher price level, consumers need more money to make purchases that they want. This increase in demand for money causes higher interest rates. The higher interest rates cause consumers and businesses to reduce their demand for interest sensitive goods. This effect is known as:

Interest Rate Effect

The major difference between real and nominal gross domestic product (GDP) is that nominal GDP:

Measures current price level and current output

As a result of a higher price level, domestic consumers have less purchasing power with their cash balances in checking and savings accounts and therefore decrease their quantity demanded for goods and services. This decrease is most likely due directly to:

Real Balance effect

An increase in the marginal propensity to consume causes an increase in which of the following?

Spending Multiplier

As a result of higher interest rates, consumers buy less interest sensitive goods like automobiles. This is an example of the:

The answer is none of the above. Since there is no mention of a price level change, then there is no simple movement along the Aggregate Demand Curve to be explained by any of the effects in a-c. As you will see, this type of change will cause a shift of the Aggregate Demand Curve.

In an economy with lump-sum taxes and no international sector, assume that the marginal propensity to consume is equal to .8. Which of the following will necessarily be true?

The government expenditure multiplier will be equal to 5.

Suppose that the consumer price index rises from 100 to 200. From this information we may conclude that:

The prices in an average consumer's market basket are doubled.

Assume all other factors remain constant when interest rates fall. Then consumers would be able to borrow easier and the demand for real goods and services would rise. This is an example of:

This is a tough question at this point. If you got it right, give yourself a star! The correct answer is none of the above. The first three responses help describe changes in the amount of real goods and services demanded as a result of changes in the price level. Here, we are considering a change in interest rates autonomously and not as the result of a price level change. It turns out this kind of autonomous change causes the entire demand curve to shift, and that is the subject of our next section.

Aggregate Demand may be measured by adding:

consumption, investment, government spending, and net exports