Principles of Economics (Second Edition)
2nd Edition
ISBN: 9780393614077
Author: coppock, Lee; Mateer, Dirk
Publisher: W. W. Norton & Company
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Question
Chapter 26, Problem 1QFR
To determine
To explain:
The three reasons for the aggregate
Expert Solution & Answer
Explanation of Solution
The downward sloping of aggregate demand is shown in the figure below:
Figure (A)
The three reasons for the aggregate demand curve to slope downward are:
Wealth effect:
The aggregate demand curve is sketched on the basis that a constant supply of money is maintained by the government. As the
Interest rate effect:
As prices rise, households and businesses need more money to manage their operations. But the money supply is fixed. The increase in demand for a fixed money supply leads to the rise in price of money and interest rate. As interest rate rise, interest sensitive expenditure will decrease. The other reason for the inverse relationship between the price level and the demand for real GDP is therefore the interest rate effect.
Net exports effect:
As the rate of domestic prices rises, international made products become comparatively cheaper in order to increase demand for imports. Moreover, the increase in the domestic price level also implies that domestic made products are comparatively more costly to overseas consumers, thereby reducing demand for exports. Net exports reduce as imports rise. Since net exports are an element of real GDP, there is a decline in real GDP demand as net exports fall.
The three factors affecting the shift in the aggregate demand curve are:
Exchange rates:
When the exchange rate of a country rises, net exports reduce and aggregate expenditure decreases at all rates. This implies the decrease in the AD curve.
Distribution of income:
This relates directly to salaries and revenues. When the real wages of the worker rise, individual will have more money on their hands since they have increased their overall income. When this occurs, they prioritize consumption, leading to higher consumption costs.Foreign income:
This refers to U.S. economic output to worldwide revenue from its trading partners. U.S. exports will rise when foreign revenue increases, causing aggregate demand to rise.
Economics Concept Introduction
Aggregate demand:
Aggregate demand (AD) is the total quantity of products and services that customers are prepared to buy in a specified economy over a period of time. Occasionally aggregate demand moves in a manner that changes its
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Click on the link to study the Economics in the News. Then answer the following questions.
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3. Use the AS-AD model to show the changes in aggregate demand and aggregate supply that occurred in
2016 and 2017 that brought the economy to its situation in mid-2017.
The graph shows the U.S. economy in the second quarter of 2016.
Draw and label the long-run aggregate supply curve in 2017.
Draw and label the aggregate demand curve in 2017.
Draw a point at the short-run macroeconomic equilibrium in the second quarter of 2017.
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Price level (GDP deflator, 2009=100)
LAS 16
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$16.7
100-
16.6
16.7 16.8 16.9 17.0
SAS 16
= SAS17
AD 16
17.1
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17.3
Real GDP (trillions of 2009 dollars)
>>> Draw only the objects specified in the question.
LV
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Price level (GDP deflator, 2009=100)
Fed Raises Rates As Job Gains, Firming Inflation Stoke Confidence
The U.S. Federal Reserve raised interest rates on Wednesday. The rate rise was the second in three months.
This second rise comes in an economy that is growing faster and creating jobs at a more rapid pace. These
gains are accompanied by a rising inflation rate.
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Source: Reuters, March 15, 2017
Describe the process by which the Fed's action reported in the news clip flows through the economy.
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LAS
SAS
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When the Fed raises the interest rate,
A. aggregate demand decreases and short-run aggregate supply increases, and the price level falls
B. aggregate demand increases and real GDP increases
C. aggregate demand decreases and the price level falls
D. short-run aggregate supply increases and the price level falls
The graph shows the long-run aggregate supply curve and the short-run aggregate supply curve.
Draw the AD curve to illustrate the state of the economy…
Price level (GDP deflator, 2009=100)
Millennials Are Starting to Spend More
Millennials, who spend an average of $85 a day, are expected to spend at a higher rate in the next fifteen years.
Only 37 percent of Americans report higher spending today than a year ago, while 42 percent of millennials say
they are spending more. Millennials are spending more on rent or mortgages and leisure activities than they
were spending a year ago.
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Source: Business Journal, May 25, 2016
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Describe the macroeconomic equilibrium after the change in spending by millennials.
If the economy had been at a below full-employment equilibrium, then the economy will
A. move to an above full-employment equilibrium with real GDP less than potential GDP
B. move to a full-employment equilibrium as short-run aggregate supply increases at the same time
'C. move to a full-employment equilibrium and equilibrium real GDP equals potential GDP
D. remain stuck in a below full-employment equilibrium
If the economy…
Chapter 26 Solutions
Principles of Economics (Second Edition)
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