Gordon_Answers11e_ch07

Gordon_Answers11e_ch07 - 70 Gordon Macroeconomics, Eleventh...

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70 Gordon • Macroeconomics, Eleventh Edition ± 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 AD Curve” in Section 7-3, Gordon has replaced the explanation of “what shifts the AD curve.” In Section 7-9, the author has modified the explanation of “stabilizing effects falling prices.” ± Answers to Questions in the Textbook 1. 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 prices constant . 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. 2. a. The AD 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 M / P 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. b. The AD curve is flatter when the income responsiveness of the demand for money is larger because the LM curve is steeper. A steep LM curve amplifies the effect on output of a higher real money supply, all other things held equal. 3. a. Shifts the LM curve to the right; therefore, AD shifts to the right. b. 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 IS curve to the right and causes a movement up the LM curve. 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. c.
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This note was uploaded on 09/04/2010 for the course ECON 311 taught by Professor Gordon during the Spring '08 term at Northwestern.

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Gordon_Answers11e_ch07 - 70 Gordon Macroeconomics, Eleventh...

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