Module 17

Decrease in the stock market decrease aggregate demand by decreasing which of the following? a. consumer wealth b. the price level c. the stock of existing physical capital d. interest rate e. tax revenues

a. consumer wealth

The Consumer Confidence Index is used to measure which of the following? a. the level of consumer spending b. the rate of return on investments c. consumer expectations d. planned investment spending e. the level of current disposable income

c. consumer expectations

Which of the following explains the slope of the aggregate demand curve? I. the wealth effect of a change in the aggregate price level II. the interest rate effect of a change in the aggregate price level III. the production-substitution effect of a change in the aggregate price level a. I only b. II only c. III only d. I and II only e. I, II, and III

d. I and II only

aggregate demand curve

shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government and the rest of the world

monetary policy

the central bank's use of changes in the quantity of money or the interest rate to stabilize the economy.

wealth effect of a change in the aggregate price level

the change in consumer spending caused by he altered purchasing power of consumer's assets.

interest rate effect of a change in the aggregate price level

the change in investment and consumer spending caused by altered interest rates that result form changes in the demand for money.

Fiscal policy

the use of taxes, government transfers, or government purchases of goods and services to stabilize the economy.

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

a. This is a shift of aggregate demand curve. A decrease in the quantity of money raises the interest rate, since people now want to borrow more and lend less. A higher interest rate reduces investment and consumer spending at any given aggregate price level, so the aggregate demand curve shifts to the left. b. This is a movement up along the aggregate demand curve. As the aggregate price level rises, the real value of money holding falls. This is the interest rate effect of a change in the aggregate price level: as the value of money falls. people want to hold more money. They do so by borrowing more and lending less. This leads to a rise in spending. So it is a movement along the aggregate demand curve. c. This is a shift of the aggregate demand curve. Expectations of a poor job market, and so lower average disposable incomes, will reduce people's consumer spending today at any given aggregate price level. So the aggregate demand curve shifts to the left. d. This is a shift of the aggregate demand curve. A fall in tax rates raises people's disposable income. At any given aggregate price level, consumer spending is now higher. So the aggregate demand curve shifts to the right. e. This is a movement down along the aggregate demand curve. As the aggregate price level falls, the real value of assets rises. This is the wealth effect of a change in the aggregate price level: as the value of assets rises, people will increase their consumption plans. This leads to higher consumer spending. So it is a movement along the aggregate demand curve. f. This is a shift of the aggregate demand curve. A rise in the real value of assets in the economy due to a surge in real estate values raises consumer spending at any given aggregate price level. So the aggregate price level. So the aggregate demand curve shifts to the right.

Which of the following government policies will shift the aggregate demand curve to the left? a. a decrease in the quantity of money b. an increase in government purchases of goods and services c. a decrease in taxes d. a decrease in interest rates e. an increase in government transfers

a. a decrease in the quantity of money

Which of the following will shift the aggregate demand curve to the right? a. a decrease in wealth b. pessimistic consumer expectations c. a decrease in the existing stock of capital d. contractionary fiscal policy e. a decrease in the quantity of money.

c. a decrease in the existing stock of capital