Question 1

Which of the following will increase aggregate demand in the United States?

Accepted Answer

An increase in wealth due to a substantial appreciation in the value of stocks will increase consumers' confidence and lead to higher consumption spending, ultimately increasing aggregate demand. A higher price level (A) will decrease aggregate demand by reducing consumer consumption and investment spending. An increase in the real interest rate (B) will also decrease aggregate demand by reducing consumption and investment spending as borrowing becomes more expensive. A decrease in real income in Japan and Western Europe (D) will decrease their demand for US goods and services, leading to a decrease in US aggregate demand.

Question 2

The negative slope of the aggregate demand curve is caused by:

Accepted Answer

The negative slope of the aggregate demand curve is caused by the real balances effect, the interest rate effect, and the net exports effect. The real balances effect suggests that as the price level increases, the purchasing power of individuals' wealth decreases, reducing their real money balances and ultimately decreasing their consumption spending. The interest rate effect suggests that as the price level increases, there is an increased demand for money, which drives up interest rates and ultimately decreases investment spending. Finally, the net exports effect suggests that as the price level increases, domestic goods become relatively more expensive, reducing net exports and ultimately decreasing aggregate demand.

Question 3

The real balances effect predicts that higher prices:

Accepted Answer

Higher prices reduce the real value of money holdings, making people feel poorer, leading them to save more and spend less.

Question 4

The interest rate effect predicts that higher prices:

Accepted Answer

Higher prices increase the demand for money, leading to higher interest rates, which in turn reduces investment.

Question 5

When the supply of credit is fixed,an increase in the price level stimulates the demand for credit,which in turn reduces consumption and investment spending.This argument is called the:

Accepted Answer

This argument is called the interest-rate effect, which states that an increase in the price level (inflation) leads to an increase in interest rates, which reduces the quantity of money demanded and thus reduces consumption and investment spending.

Question 6

The net exports effect is the inverse relationship between net exports and the ____ of an economy.

Accepted Answer

The net exports effect is the impact that changes in a country's exchange rate have on its net exports. An increase in the exchange rate will make a country's goods relatively more expensive for foreign buyers, leading to a decrease in exports and an increase in imports. As a result, net exports will decrease. This decrease in net exports reduces the overall demand for goods and services in the economy, which may lead to a decrease in the price level as businesses reduce their prices to attract buyers. Therefore, the net exports effect is the inverse relationship between net exports and the price level.

Question 7

When prices rise,consumers and businesses hold larger money balances.This reduces the supply of loanable funds,increases the interest rate,and discourages both consumption and investment.This process is called the:

Accepted Answer

The answer of When prices rise,consumers and businesses hold larger...

Question 8

The interest-rate effect is the impact on real GDP caused by the ____ relationship between the price level and the interest rate.

Accepted Answer

The answer of The interest-rate effect is the impact on...

Question 9

The aggregate demand curve is downward sloping because:

Accepted Answer

At lower price levels, domestic goods become cheaper for foreign buyers, leading to an increase in exports, which increases real GDP.

Question 10

The interest-rate effect is the impact on real GDP caused by the direct relationship between the interest rate and the:

Accepted Answer

The answer of The interest-rate effect is the impact on...

Question 11

Which of the following correctly describes the interest-rate effect?

Accepted Answer

The interest-rate effect suggests that a lower price level increases consumer purchasing power, which reduces the demand for credit, leading to lower interest rates. This, in turn, encourages more debt-financed borrowing, increasing the quantity of real GDP demanded.

Question 12

The idea that higher prices reduce the purchasing power of financial assets and lead to less consumption is known as the:

Accepted Answer

The real balances effect is directly related to the decrease in purchasing power of financial assets due to higher prices. As prices rise, the real value of financial assets decreases, and therefore, there is a reduction in consumption. The other options, such as the interest rate effect, foreign purchases effect, income effect, and aggregate demand effect, are related to different factors that affect the overall level of demand in the economy.

Question 13

The real balances effect is the impact on real GDP caused by the ____ relationship between the price level and the real value of financial assets.

Accepted Answer

The real balances effect is the impact of changes in the price level on real GDP due to the inverse relationship between the price level and the real value of financial assets. As the price level increases, the real value of financial assets decreases, leading to a decrease in consumer spending and a decrease in real GDP. Conversely, a decrease in the price level increases the real value of financial assets, leading to an increase in consumer spending and an increase in real GDP.

Question 14

The real balances effect occurs because a higher price level will reduce the real value of people's:

Accepted Answer

The real balances effect occurs when an increase in prices reduces the real value of people's financial assets, such as savings, investments, and cash. As prices rise, the purchasing power of these assets decreases, making people feel relatively poorer and leading them to decrease their spending.

Question 15

Suppose the price level falls.The result is that the:

Accepted Answer

When the price level falls, the real value of money increases, which means consumers have more purchasing power. This leads to an increase in consumption and shifts the aggregate demand curve to the right, not the aggregate supply curve. The downward slope of the aggregate demand curve is partly due to the real balances effect, which is the increase in consumption and investment spending that results from the increase in the real value of money balances when the price level falls.

Question 16

According to the interest rate effect,as the price level:

Accepted Answer

According to the interest rate effect, as the price level rises, interest rates rise, and people buy less. This is because higher prices lead to an increase in demand for money, causing a decrease in bond prices and an increase in interest rates. As a result, borrowing becomes more expensive, reducing the demand for goods and services.

Question 17

Which of the following will most likely increase aggregate demand?

Accepted Answer

An increase in business investment spending will lead to higher aggregate demand as businesses are spending more money on capital goods, increasing production and employment, and ultimately increasing spending in the economy. Decreases in stock market prices and real GDP are likely to negatively impact consumer confidence and spending, leading to a decrease in aggregate demand. A decrease in the expected inflation rate may have a positive impact on consumer spending, but it is not a significant factor in increasing aggregate demand.

Question 18

According to the net exports effect,as the price level falls relative to the rest of the world,

Accepted Answer

When the price level falls relative to the rest of the world, U.S. goods become relatively cheaper compared to foreign goods. This makes U.S. exports relatively more attractive to foreigners, leading to an increase in net exports. This increase in net exports shifts the aggregate demand curve to the right. Therefore, foreigners buy more U.S. goods (choice B).

Question 19

The net exports effect is the ____ relationship between net exports and the price level of an economy.

Accepted Answer

The net exports effect is an inverse relationship between net exports and the price level of an economy. This is because as prices rise, exports become relatively more expensive for foreign buyers, leading to a decrease in demand for exports and vice versa.

Question 20

The net exports effect exists because a:

Accepted Answer

The net exports effect refers to how changes in the price level affect a country's exports and imports. A lower price level will make domestically produced exports less expensive relative to foreign goods, making them more attractive to foreign buyers and increasing exports. This will lead to a positive impact on net exports and, in turn, aggregate demand.

Quiz 14: Aggregate Demand and Supply