Chapter 12: Macroeconomics Aggregate Demand (page 239)
What are examples of aggregate demand?
Examples include consumer goods, capital goods, and government spending programs.
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Suppose that consumer spending initially rises by \(5 billion for every 1 percent rise in household wealth and that investment spending initially rises by \)20 billion for every 1 percentage point fall in the real interest rate. Also, assume that the economy’s multiplier is 4. If household wealth falls by 5 percent because of declining house values, and the real interest rate falls by 2 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? In what direction and by how much will it eventually shift?
Label each of the following descriptions as being either an immediate-short-run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregate supply curve.
A vertical line.
The price level is fixed.
Output prices are flexible, but input prices are fixed.
A horizontal line.
An upsloping curve.
Output is fixed.
Why does a reduction in aggregate demand in the actual economy reduce real output, rather than the price level? Why might a full-strength multiplier apply to a decrease in aggregate demand?
What were the monetary and fiscal policy responses to the Great Recession? What were some of the reasons suggested for why those policy responses didn’t seem to have as large an effect as anticipated on unemployment and GDP growth?
Explain how an upsloping aggregate supply curve weakens the realized multiplier effect from an initial change in investment spending.
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