Chapter 12: Q4. (page 259)
Explain how an upsloping aggregate supply curve weakens the realized multiplier effect from an initial change in investment spending.
The multiplier effect gets weak because aggregate demand changes affect prices and output due to an upward-sloping aggregate supply curve.
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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?
what is aggregate demand
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?
An increase in aggregate demand.
A decrease in aggregate supply, with no change in aggregate demand.
Equal increases in aggregate demand and aggregate supply.
A decrease in aggregate demand.
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?
What shifts the aggregate demand curve?
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