Question 1

The interest-rate and real-balances effects are important because they help explain:
A) rightward and leftward shifts of the aggregate demand curve.
B) why demand-management policy cannot be used effectively to curb stagflation.
C) the shape of the aggregate demand curve.
D) the shape of the aggregate supply curve.

Accepted Answer

C

Question 2

Which effect best explains the downward slope of the aggregate demand curve?
A) a multiplier effect
B) an income effect
C) a substitution effect
D) an interest rate effect

Accepted Answer

The downward slope of the aggregate demand curve is best explained by the interest rate effect. As the price level decreases, interest rates tend to fall, leading to increased borrowing and spending by both consumers and businesses, which in turn increases aggregate demand. This is known as the interest rate effect.

Question 3

Which effect best explains the downward slope of the aggregate demand curve?
A) a multiplier effect
B) an income effect
C) a substitution effect
D) a real-balances effect

Accepted Answer

The real-balances effect suggests that as the overall price level in the economy increases, the purchasing power of consumer wealth decreases, resulting in a decrease in consumer spending. This effect contributes to the downward slope of the aggregate demand curve.

Question 4

The real-balances, interest rate, and foreign trade effects all help explain:
A) why the aggregate demand curve is downward sloping.
B) why the aggregate supply curve is upward sloping.
C) shifts in the aggregate demand curve.
D) shifts in the aggregate supply curve.

Accepted Answer

The real-balances effect refers to the purchasing power of consumers as the price level changes, which influences their ability and willingness to consume goods and services. The interest rate effect refers to changes in borrowing costs that influence investment and consumption decisions. The foreign trade effect relates to changes in net exports as the value of the domestic currency fluctuates relative to other currencies. These three effects all contribute to changes in overall demand in the economy, which explains why the aggregate demand curve is downward sloping.

Question 5

The interest-rate effect suggests that:
A) a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending.
B) an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending.
C) an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.
D) an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending.

Accepted Answer

The interest-rate effect is the idea that when the price level increases, the demand for money increases, leading to an increase in interest rates. If interest rates increase, consumption and investment spending will decrease. This is because borrowing money becomes more expensive and less attractive to consumers and investors. Therefore, the best choice for the interest-rate effect is C.

Question 6

Which of the factors below best explain the downward slope of aggregate demand curve? The following list of factors, are related to the aggregate demand curve. 
A) 2, 4, and 6
B) 7, 9, and 10
C) 1, 3, and 8
D) 4, 6, and 7

Accepted Answer

The answer of Which of the factors below best explain...

Question 7

The following table is for a particular country in which C is consumption expenditures, IS1U1B1gS1U1B0 is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars. Each question is independent of the other questions.
 
-Refer to the above table. The wealth or real balances effect of changes in the price level is:
A) shown by columns (1) and (2) of the table.
B) shown by columns (1) and (5) of the table.
C) shown by columns (1) and (4) of the table.
D) not shown by the data in the table.

Accepted Answer

The answer of The following table is for a particular...

Question 8

Other things being equal, the higher the price level, the lower the level of domestic output purchased. This occurs because of:
A) the real-balances effect.
B) consumer spending on capital goods.
C) the full-employment-unemployment rate.
D) the sensitivity to demand-pull inflation.

Accepted Answer

The real-balances effect states that as the price level increases, the real value of wealth decreases, resulting in lower purchasing power for consumers. As a result, consumers will reduce their spending, leading to a decrease in domestic output purchased. The other options listed do not directly relate to the relationship between price level and domestic output purchased.

Question 9

The aggregate demand curve shows the:
A) inverse relationship between the price level and real GDP purchased.
B) direct relationship between the price level and real GDP produced.
C) inverse relationship between interest rates and real GDP produced.
D) direct relationship between real-balances and real GDP purchased.

Accepted Answer

The aggregate demand curve shows the inverse relationship between the price level and real GDP purchased. As the price level increases, the purchasing power of consumers decreases, which leads to a decrease in real GDP purchased.

Question 10

The real-balances effect indicates that:
A) an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending.
B) a lower price level will decrease the real value of many financial assets and therefore reduce spending.
C) a higher price level will increase the real value of many financial assets and therefore increase spending.
D) a higher price level will decrease the real value of many financial assets and therefore reduce spending.

Accepted Answer

The real-balances effect suggests that a higher price level will decrease the purchasing power of a given amount of money, reducing the real value of financial assets, such as savings accounts and bonds, and therefore reducing consumer and business spending. Choice A is describing the interest-rate effect, not the real-balances effect. Choice B is describing the wealth effect. Choice C is also describing the wealth effect, but in terms of increased real values of financial assets leading to increased spending.

Question 11

A decrease in interest rates caused by a change in the price level would cause a(n):
A) decrease in aggregate demand.
B) increase in aggregate demand.
C) decrease in the quantity of real domestic output demanded.
D) increase in the quantity of real domestic output demanded.

Accepted Answer

A decrease in interest rates would make borrowing cheaper, which would encourage consumers and businesses to spend and invest more, increasing demand for goods and services. This would result in an increase in the quantity of real domestic output demanded.

Question 12

Which of the following explains why the aggregate demand schedule is downward sloping?
A) the real-balances effect
B) the interest rate effect
C) the foreign trade effect
D) all of the above

Accepted Answer

The downward slope of the aggregate demand schedule is due to a combination of the real-balances effect, the interest rate effect, and the foreign trade effect. As the price level decreases, the real value of money increases, which encourages consumers to spend more, leading to an increase in aggregate demand (real-balances effect). Additionally, when the price level decreases, interest rates also decrease, making borrowing cheaper and encouraging investment and consumption spending, further increasing aggregate demand (interest rate effect). Finally, a decrease in the price level makes domestic goods relatively cheaper compared to foreign goods, leading to an increase in net exports and boosting aggregate demand (foreign trade effect). All of these factors contribute to the downward slope of the aggregate demand schedule.

Question 13

The real-balances effect suggests that a:
A) lower price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending.
B) lower price level will decrease the real value of many financial assets and therefore cause an increase in spending.
C) lower price level will increase the real value of many financial assets and therefore cause an increase in spending.
D) higher price level will increase the real value of many financial assets and therefore cause an increase in spending.

Accepted Answer

The real-balances effect is based on the idea that as the price level decreases, the real value (purchasing power) of people's financial assets (like cash in their wallets, bank accounts, and bonds) increases. This increase in the real value of financial assets encourages people to spend more money, leading to an increase in consumption and investment spending. Therefore, a lower price level will increase the real value of many financial assets and cause an increase in spending, as stated in choice C.

Question 14

The aggregate demand curve:
A) is upward sloping because a higher price level is necessary to make production profitable as production costs rise.
B) is downward sloping because production costs decline as real output increases?
C) shows the amount of expenditures required to induce the production of each possible level of real output.
D) shows the amount of real output which will be purchased at each possible price level.

Accepted Answer

The aggregate demand curve shows the amount of real output which will be purchased at each possible price level. As the price level increases, the quantity of real output demanded decreases due to the inverse relationship between price and quantity demanded in the market.

Question 15

When the price level decreases:
A) the demand for money falls and the interest rate falls.
B) holders of financial assets with fixed money values decrease their spending.
C) holders of financial assets with fixed money values have less purchasing power.
D) there is a decrease in consumer spending that is sensitive to changes in interest rates.

Accepted Answer

The answer of When the price level decreases:
A) the demand...

Question 16

The following table is for a particular country in which C is consumption expenditures, IS1U1B1gS1U1B0 is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars.
 
-Refer to the above table. The interest rate effect of changes in the price level is shown by columns:
A) (1) and (4) of the table.
B) (5) and (6) of the table.
C) (1) and (3) of the table.
D) (2) and (4) of the table.

Accepted Answer

The interest rate effect of changes in the price level is shown by comparing column (1) with column (3). As the price level increases, the real money supply decreases, causing interest rates to increase, which in turn reduces investment expenditures and consumption expenditures. Therefore, comparing the values in columns (1) and (3) shows the effect of changes in the price level on interest rates and investment and consumption expenditures.

Question 17

The interest rate effect indicates that a(n):
A) decrease in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.
B) decrease in the price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending.
C) increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending.
D) increase in the supply of money will increase interest rates and decrease interest-sensitive consumption and investment spending.

Accepted Answer

The answer of The interest rate effect indicates that a(n):
A)...

Question 18

The aggregate demand curve is:
A) vertical if full employment exists.
B) horizontal when there is considerable unemployment in the economy.
C) downward sloping because of the interest-rate, real balances, and foreign trade effects.
D) downward sloping because production costs decrease as real output increases.

Accepted Answer

The aggregate demand curve is downward sloping because of the interest-rate effect (as prices decrease, interest rates decrease, which increases investment and consumption), the real balances effect (as prices decrease, purchasing power increases, which increases consumption), and the foreign trade effect (as prices decrease, net exports increase due to increased competitiveness).

Question 19

The shape of the aggregate demand curve is explained by the:
A) interest rate, real balances, and foreign trade effects.
B) rate of inflation and the natural rate of unemployment.
C) policies to stabilize prices and reduce unemployment.
D) ratchet effect.

Accepted Answer

The shape of the aggregate demand curve is explained by the interest rate, real balances, and foreign trade effects. The interest rate effect results from changes in the interest rate that impact consumer and investor borrowing and spending. The real balances effect is based on changes in the purchasing power of money that affect consumer spending. Finally, the foreign trade effect reflects changes in net exports due to changes in the exchange rate. Together, these three factors shape the downward-sloping aggregate demand curve.

Question 20

Which of the following is incorrect?
A) As the Canadian price level rises, Canadian goods become relatively more expensive so that its exports fall and its imports rise.
B) As the price level falls, the demand for money declines, the interest rate declines, and interest rate-sensitive spending increases.
C) When the price level increases, real balances increase, businesses and households find themselves wealthier and therefore increase their spending.
D) Given aggregate demand, an increase in aggregate supply increases real output and, assuming downward flexible prices, reduces the price level.

Accepted Answer

When the price level increases, real balances decrease, making businesses and households poorer and therefore leading to a decrease in their spending.

Quiz 10: Aggregate Demand and Aggregate Supply

The interest-rate and real-balances effects are important because they help explain:

Which effect best explains the downward slope of the aggregate demand curve?

Which effect best explains the downward slope of the aggregate demand curve?

The real-balances, interest rate, and foreign trade effects all help explain:

The interest-rate effect suggests that:

Which of the factors below best explain the downward slope of aggregate demand curve? The following list of factors, are related to the aggregate demand curve.

Other things being equal, the higher the price level, the lower the level of domestic output purchased. This occurs because of:

The aggregate demand curve shows the:

The real-balances effect indicates that:

A decrease in interest rates caused by a change in the price level would cause a(n) :

Which of the following explains why the aggregate demand schedule is downward sloping?

The real-balances effect suggests that a:

The aggregate demand curve:

When the price level decreases:

The interest rate effect indicates that a(n) :

The aggregate demand curve is:

The shape of the aggregate demand curve is explained by the:

Which of the following is incorrect?