Changes in the Eleventh Edition
This chapter’s structure and content remain largely unchanged from the 10th edition. In the Box:
“Learning About Diagrams: The
Curve” in Section 7-3, Gordon has replaced the explanation of
“what shifts the
curve.” In Section 7-9, the author has modified the explanation of “stabilizing
effects falling prices.”
Answers to Questions in the Textbook
In microeconomics, the demand curve shows the various quantities of a specific product that
a consumer wants at various prices for that product,
holding preferences, income, and other
. The quantity demanded changes because of a change in relative prices. In
macroeconomics, the aggregate demand curve shows the various quantities of GDP demanded at
various price levels in the economy. Here, there is no change in relative prices of other products
(although if the nominal wage is unchanged, there is a change in the real wage, which is a relative
price). In macroeconomics, the increase in output demanded arises because the changing price level
causes the real money supply (and interest rates) to change.
curve is steeper when the interest responsiveness of the demand for money becomes
larger. When the interest responsiveness of the demand for money becomes larger, the demand
for money curve will have a flatter slope relative to the
axis. A given increase in the real
money supply will therefore produce less of a reduction in the interest rate, less of an expansion
in autonomous planned spending, and less of an expansion in real GDP. Consequently, a given
reduction in the price level, which increases the real money supply, will have a smaller effect on
real GDP when the interest responsiveness of the demand for money is larger.
curve is flatter when the income responsiveness of the demand for money is larger
curve is steeper. A steep
curve amplifies the effect on output of a higher
real money supply, all other things held equal.
curve to the right; therefore,
shifts to the right.
An increase in foreign income shifts the aggregate demand to the right. The rise in foreign
income causes exports and therefore net exports to increase at each level of income and interest
rate in this country, i.e., autonomous planned spending rises. That increase will cause firms to
expand output, resulting in a rise in real GDP at each interest rate. The increase in real GDP at
each interest rate shifts the
curve to the right and causes a movement up the
Therefore, there is an increase in aggregate demand at every price level, which is represented
graphically as a shift to the right of the aggregate demand curve.