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Chapter 12: Aggregate Demand Curve (page 239)

What is the wealth effect?

Short Answer

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Price level decrease will influence spending decisions of households.

Step by step solution

01

Aggregate Demand Curve

The Wealth effect states that as the price level decreases, the purchasing power of households increases, meaning that people have more income and are richer, and are more likely to spend on goods and services within the economy, thus promoting further consumption and growth within the economy

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Most popular questions from this chapter

Refer to the data in the table that accompanies problem 2. Suppose that the present equilibrium price level and level of real GDP are 100 and \(225, and that data set B represents the relevant aggregate supply schedule for the economy.

(A)(B)(C)
Price LevelReal GDPPrice LevelReal GDPPrice LevelReal GDP
110275100200110225
100250100225100225
9522510025095225
9020010027590225
  1. What must be the current amount of real output demanded at the 100 price level?
  2. If the amount of output demanded declined by \)25 at the 100 price level shown in B, what would be the new equilibrium real GDP? In business cycle terminology, what would economists call this change in real GDP?

Explain how an upsloping aggregate supply curve weakens the realized multiplier effect from an initial change in investment spending.

Suppose that the table presented below shows an economy’s relationship between real output and the inputs needed to produce that output:

Input QuantityReal GDP
150.0\(400
112.5300
75.0200

  1. What is productivity in this economy?

  2. What is the per-unit cost of production if the price of each input unit is \)2?

  3. Assume that the input price increases from \(2 to \)3 with no accompanying change in productivity. What is the new per-unit cost of production? In what direction would the $1 increase in input price push the economy’s aggregate supply curve? What effect would this shift of aggregate supply have on the price level and the level of real output?

  4. Suppose that the increase in input price does not occur but, instead, that productivity increases by 100 percent. What would be the new per-unit cost of production? What effect would this change in per-unit production cost have on the economy’s aggregate supply curve? What effect would this shift of aggregate supply have on the price level and the level of real output?

At the current price level, producers supply \(375 billion of final goods and services while consumers purchase \)355 billion of final goods and services. The price level is:

  1. above equilibrium.
  2. at equilibrium.
  3. below equilibrium.
  4. more information is needed.

what is aggregate demand
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