Question 1

When interest rates rise in the United States, what is the effect on net exports and aggregate expenditure?

Accepted Answer

When interest rates rise in the United States, it attracts foreign capital seeking higher returns, causing the dollar to appreciate. An appreciated dollar makes U.S. exports more expensive and imports cheaper, reducing exports and increasing imports. This leads to a decrease in net exports and a consequent fall in aggregate expenditure.

Question 2

When prices rise in the United States, what is the effect on net exports and aggregate expenditure?

Accepted Answer

When prices rise in the United States, exports become more expensive, making it harder to compete in global markets. This results in a decrease in exports, while cheaper imports become more attractive to domestic consumers, leading to an increase in imports. As a result, net exports fall, and aggregate expenditure also falls as consumers and businesses spend more on cheaper imported products.

Question 3

When prices rise in the United States, what is the effect on consumption and aggregate expenditure?

Accepted Answer

When prices rise in the United States, the real value of wealth decreases because the purchasing power of people's money decreases. This leads to a decrease in consumption as people can afford to buy fewer goods and services with their money. As a result, aggregate expenditure also decreases.

Question 4

When prices fall in Germany, what is the effect on consumption and aggregate expenditure in Germany?

Accepted Answer

When prices fall in Germany, the real value of wealth increases as consumers can purchase more goods and services with the same amount of money. This leads to an increase in consumption as consumers feel more confident about their purchasing power. As a result, aggregate expenditure in Germany also increases.

Question 5

The higher the prices in an economy, the:
(i) lower the purchasing power of the currency.
(ii) lower the real wealth in the economy.
(iii) higher the real wealth in an economy.
(iv) more expensive the country's exports.

Accepted Answer

(i) When the prices increase, the purchasing power of the currency decreases because more units of currency are required to purchase the same goods and services.
(ii) When the prices increase, the real wealth in the economy decreases because the same amount of money can purchase fewer goods and services.
(iv) When the prices increase, the country's exports become more expensive because foreign buyers need to pay more in their own currency to purchase the same amount of goods from the country.

Question 6

The lower the prices in an economy, the:
(i) lower the purchasing power of the currency.
(ii) lower the real wealth in the economy.
(iii) higher the real wealth in an economy.
(iv) cheaper the country's exports.

Accepted Answer

Lower prices in an economy lead to an increase in the purchasing power of the currency and an increase in real wealth. Cheaper exports may also stimulate economic activity and increase real wealth. Therefore, options (i) and (ii) are incorrect, while options (iii) and (iv) are correct. Choice (C) includes only these two options.

Question 7

The lower the GDP deflator in an economy, the:
(i) higher the purchasing power of the currency.
(ii) lower the real wealth in the economy.
(iii) higher the real wealth in an economy.
(iv) cheaper the country's exports.

Accepted Answer

The GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. A lower GDP deflator indicates lower price levels, which means the purchasing power of the currency is higher (i), real wealth could be considered higher because the value of goods and services relative to prices is greater (iii), and exports would be cheaper to foreign buyers (iv). Lower GDP deflator does not necessarily mean lower real wealth in the economy (ii), so that statement is incorrect.

Question 8

The higher the GDP deflator in an economy, the:
(i) higher the purchasing power of the currency.
(ii) lower the real wealth in the economy.
(iii) higher the real wealth in an economy.
(iv) more expensive the country's exports.

Accepted Answer

The GDP deflator is a measure of the price level in an economy. A higher GDP deflator means that prices of goods and services have increased in the economy. 
(i) Higher prices mean lower purchasing power of the currency as it requires more currency to buy the same amount of goods and services.
(ii) As prices have increased, the real value of wealth has decreased. Therefore, the statement (ii) is correct.
(iii) The increase in prices does not necessarily lead to an increase in real wealth. Hence, the statement (iii) is incorrect.
(iv) A higher price level in the country means that its exports will be more expensive for foreign buyers. Therefore, the statement (iv) is correct. 
Thus, option C, (ii) and (iv) is the correct choice.

Question 9

When prices fall in Germany, what is the effect on nominal debt and consumption in Germany?

Accepted Answer

When prices fall, the nominal value of debt remains unchanged because the face value of debt does not adjust with inflation or deflation. However, the real value of debt increases because the same nominal debt represents a larger quantity of goods and services when prices are lower. This increase in the real burden of debt can discourage consumption as individuals and businesses may need to allocate more resources to servicing their debt.

Question 10

When prices rise in Germany, what is the effect on nominal debt and consumption in Germany?

Accepted Answer

When prices rise, the nominal value of debt remains the same, but its real value decreases because the money borrowed can now buy less due to inflation. This reduction in the real burden of debt can make consumers feel wealthier or less constrained, potentially encouraging them to spend more.

Question 11

In 2019, cardamom prices in India fell by nearly 16%. How does this affect net exports and aggregate expenditure in India?

Accepted Answer

When cardamom prices fall, it becomes cheaper for foreign buyers, potentially increasing exports. Higher exports can lead to an increase in net exports and aggregate expenditure.

Question 12

A fall in prices causes:

Accepted Answer

A fall in prices will cause movement along the aggregate demand curve, as a lower price level will increase the quantity demanded of goods and services. This is represented by a movement leftward along the aggregate demand curve. It does not cause a shift in the curve. Similarly, a fall in prices will not cause a shift in the aggregate supply curve as the quantity supplied is not affected by changes in the price level. Therefore, the correct answer is D - movement along a curve, not a shift in a curve.

Question 13

A rise in prices leads to a:

Accepted Answer

A rise in prices leads to a movement up and to the left along the same aggregate demand curve, as higher prices typically reduce the quantity of goods and services demanded.

Question 14

A fall in prices leads to a:

Accepted Answer

A fall in prices leads to an increase in quantity demanded, which is represented by a movement down along the same aggregate demand curve. This is because a fall in prices increases the purchasing power of consumers, leading them to buy more goods and services at each given price level. Thus, the aggregate demand curve shifts down and to the right. Choice A is incorrect because a movement up and to the left along the same aggregate demand curve would represent a decrease in quantity demanded due to an increase in prices. Choices C and D are also incorrect, as they represent shifts in the entire aggregate demand curve, which would be caused by changes in factors such as consumer confidence, government spending or monetary policy.

Question 15

A spending cut leads to a:

Accepted Answer

A spending cut reduces the amount of money available for consumers and businesses to spend, which leads to a decrease in aggregate demand. This decrease in demand is reflected by a leftward shift in the aggregate demand curve.

Question 16

An increase in spending leads to a:

Accepted Answer

An increase in spending would increase the demand for goods and services, leading to an increase in the aggregate demand. This results in a rightward shift of the aggregate demand curve.

Question 17

Holding other things equal, an increase in consumer spending leads to a:

Accepted Answer

An increase in consumer spending leads to an increase in demand for goods and services. This increase in demand shifts the aggregate demand curve to the right, as more spending leads to higher price levels and increased output.

Question 18

Ceteris paribus, a decrease in government expenditure leads to a:

Accepted Answer

A decrease in government expenditure would lead to a decrease in overall spending and a decrease in aggregate demand. This would result in a leftward shift of the aggregate demand curve.

Question 19

Ceteris paribus, an increase in investment leads to a:

Accepted Answer

An increase in investment will lead to an increase in aggregate demand, as it increases the demand for goods and services. This will result in a rightward shift of the aggregate demand curve.

Question 20

Ceteris paribus, a decrease in exports leads to a:

Accepted Answer

A decrease in exports means that there is a reduction in the amount of goods and services being sold to other countries, resulting in a decrease in aggregate demand. This leads to a leftward shift of the aggregate demand curve.

Quiz 33: Aggregate Demand and Aggregate Supply