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Chapter 12: Q1. (page 259)

Which of the following help to explain why the aggregate demand curve slopes downward?

  1. When the domestic price level rises, our goods and services become more expensive to foreigners.

  2. When government spending rises, the price level falls.

  3. There is an inverse relationship between consumer expectations and personal taxes.

  4. When the price level rises, the real value of financial assets (like stocks, bonds, and savings account balances) declines.

Short Answer

Expert verified

Option (a) and (d) explain a downward sloping aggregate demand curve.

Step by step solution

01

Explanation for the correct options

An increase in the domestic price level makes domestic products expensive for foreigners.The costly products reduce the domestic country’s net exports. A fall in net exports reduces the aggregate demand. Thus, at a higher price level, aggregate demand decreases, and the curve slopes downward.

When the price level rises, the value of financial assets decline. The decline in the value of financial assets reduces the purchasing power of the assets. So the demand for financial assets or the investment declines, and the aggregate demand curve slopes downward.

02

Explanation for the incorrect options

As government spending increases, it increases the aggregate demand equally at all levels of income. Therefore, the AD curve shifts upward.

The inverse relationship between consumer expectations and personal taxes results in the aggregate demand curve shift because taxes change consumption equally at all income levels in the opposite direction. They do not explain the slope of the curve.

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Most popular questions from this chapter

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run?

  1. An increase in aggregate demand.

  2. A decrease in aggregate supply, with no change in aggregate demand.

  3. Equal increases in aggregate demand and aggregate supply.

  4. A decrease in aggregate demand.

  5. An increase in aggregate demand that exceeds an increase in aggregate supply.

Why is the aggregate demand curve downsloping? Specify how your explanation differs from the explanation for the downsloping demand curve for a single product. What role does the multiplier play in shifts of the aggregate demand curve?

At the current price level, producers supply \(375 billion of final goods and services while consumers purchase \)355 billion of final goods and services. The price level is:

  1. above equilibrium.
  2. at equilibrium.
  3. below equilibrium.
  4. more information is needed.

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? In each case, use a diagram to show the expected effects on the equilibrium price level and the level of real output, assuming that the price level is flexible both upward and downward.

  1. A widespread fear by consumers of an impending economic depression.

  2. A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output.

  3. A reduction in interest rates.

  4. A major increase in spending for health care by the federal government.

  5. The general expectation of coming rapid inflation.

  6. The complete disintegration of OPEC, causing oil prices to fall by one-half.

  7. A 10 percent across-the-board reduction in personal income tax rates.

  8. A sizable increase in labor productivity (with no change in nominal wages).

  9. A 12 percent increase in nominal wages (with no change in productivity).

  10. An increase in exports that exceeds an increase in imports (not due to tariffs).

What shifts the aggregate demand curve?
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