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Unformatted text preview: Test 3 Chapters 7-10 Review and Extra Credit Questions Chapter 7 Aggregate Demand and Aggregate Supply 1. Describe the aggregate demand and the aggregate demand curve Aggregate Demand is the quantity demanded of all goods and services (Real GDP) at different price levels, ceteris paribus . The Aggregate Demand Curve is a curve that shows the quantity demanded of all goods and services (Real GDP) at different price levels, ceteris paribus . 2. Why does the aggregate demand curve slope downward? When the aggregate demand curve slopes downward, it indicates an inverse relationship between the price level and the quantity demanded of Real GDP. 3. Define the real balance effect, monetary wealth, and purchasing power Real balance effect is defined as the change in the purchasing power of dollar- denominated assets that results from a change in the price level. Monetary wealth is the value of a persons monetary assets. Wealth, as distinguished from monetary wealth refers to the value of all assets owned, both monetary and nonmonetary. In short, a persons wealth equals his or her monetary wealth plus nonmonetary wealth. Purchasing power is the quantity of goods and services that can be purchased with a unit of money. Purchasing power and the price level are inversely related. As the price level goes up, purchasing power goes down. 4. Define the interest rate effect and international trade effect The interest rate effect is defined as the changes in household and business buying as the interest rate changes, which in turn is a reflection of a change in the demand for or supply of credit brought on by price level changes. International trade effect is the change in foreign sector spending as the price level changes. 5. Describe the difference in a change in quantity demanded of Real GDP versus a change in aggregate demand. A change in the quantity demanded of Real GDP is brought about by a change in the price level. When the aggregate demand curve shifts, the quantity demanded of Real GDP changes even though the price level remains constant. 6. Describe factors that influence consumption (C) The four factors that affect consumption are wealth, expectations about future prices and income, the interest rate, and income taxes. Increases in wealth lead to increases in consumption. If consumption increases, then aggregate demand rises and the AD curve shifts to the right. If wealth decreases, consumption falls and AD curve shifts to the left. If individuals have expectations of lower prices in the future, they decrease current consumption expenditures, which leads to a decrease in aggregate demand. With the expectation of a higher future income, consumption increases, which leads to an increase in aggregate demand. An increase in the interest rate increases monthly payment amounts linked to purchases, and therefore reduces consumption, which leads to a decline in aggregate demand. Alternatively, a decrease in the interest rate reduces monthly payment amounts linked to the purchase of durable goods and thereby increases their...
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This note was uploaded on 08/09/2008 for the course ECON 2301 taught by Professor Allen during the Spring '08 term at Texas State Technical Colleges.
- Spring '08