3.1: Aggregate Demand

Question 1

Aggregate

Answer 1

Added all together

Question 2

Aggregate Demand

Answer 2

All the goods and services that buyers are willing and able to purchase at different price levels

Inverse relationship between price level and real gdp demand

Question 3

Why is the aggregate demand curve downward sloping?

Answer 3

The wealth effect, interest rate effect, and foreign trade effect

Question 4

The wealth effect (Real balance effect)

Answer 4

Higher price levels reduce the purchasing power of money which decreases the quantity of expenditures. Lower does the opposite

Question 5

Interest rate effect

Answer 5

When price level increases, lenders charge higher interest rates to get a real return on loans. This higher interest rate discourages consumer spending and business investment.

Question 6

Foreign Trade Effect

Answer 6

When the US price level rises, foreign buyers purchase fewer US goods and Americans buy more foreign goods causing exports to plummet, imports to rise up

Question 7

What causes shifts in aggregate demand?

Answer 7

Changes in consumer spending, change in investment spending, change in gov spending, change in net exports

Question 8

Change in consumer spending

Answer 8

• Increase in disposable income
• Consumer expectations
• Household Indebtedness
• Taxes

Question 9

Change in investment spending

Answer 9

• Real interest rates (if interest rates increase, investment and GDP decreases and vice versa)
• Future Business Expectations
• Productivity and Technology
• Business taxes

Question 10

Change in Government Spending

Answer 10

Government expenditures

Question 11

Change in net exports

Answer 11

• Exchange rates
• National income compared to abroad