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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

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?

In early 2001 investment spending sharply declined in the United States. In the 2 months following the September 11, 2001 attacks on the United States, consumption also declined. Use AD-AS analysis to show the two impacts on real GDP.

True or False. Decreases in AD normally lead to decreases in both output and the price level.

Which of the following will shift the aggregate supply curve to the right?

  1. A new networking technology increases productivity all over the economy.

  2. The price of oil rises substantially.

  3. Business taxes fall.

  4. The government passes a law doubling all manufacturing wages.

What shifts the aggregate demand curve?
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