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Chapter 12: Q2. (page 259)

Which of the following will shift the aggregate demand curve to the left?

  1. The government reduces personal income taxes.

  2. Interest rates rise.

  3. The government raises corporate profit taxes.

  4. There is an economic boom overseas that raises the incomes of foreign households.

Short Answer

Expert verified

Option (b) and (c) will result in a leftward shift in the aggregate demand curve.

Step by step solution

01

Explanation for the correct options

An increase in interest rate will decrease the investment because the funds borrowed for the investment will accrue high costs. The declined investment will reduce the aggregate demand, and the demand curve will shift to the left.

An increase in corporate profit taxes will reduce the expected rate of return after taxes. The fall in the predicted rate of return will lower the investment and the aggregate demand. Therefore, the aggregate demand curve shifts to the left.

02

Explanations for the incorrect options

A fall in personal income taxes will increase the disposable income of households. With the increase in disposable income, private consumption will rise. Therefore the aggregate demand will increase, and the demand curve will shift to the right.

An economic boom overseas will increase the U.S. net exports as foreigners increase their imports during the expansion. An increase in net exports will increase the aggregate demand curve for the U.S. The aggregate demand curve will shift to the right.

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Most popular questions from this chapter

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

Which of the following help to explain why the aggregate demand curve slopes downward?

  1. When the domestic price level rises, our goods and services become more expensive to foreigners.

  2. When government spending rises, the price level falls.

  3. There is an inverse relationship between consumer expectations and personal taxes.

  4. When the price level rises, the real value of financial assets (like stocks, bonds, and savings account balances) declines.

Suppose that the aggregate demand and aggregate supply schedules for a hypothetical economy are as shown in the following table.

Amount of Real GDP Demanded, BillionsPrice Level (Price Index)Amount of Real GDP Supplied, Billions
\(100300450
200250400
300200300
400150200
500100100

a. Use the data above to graph the aggregate demand and aggregate supply curves. What are the equilibrium price level and the equilibrium level of real output in this hypothetical economy? Is the equilibrium real output also necessarily the full-employment real output?

b. If the price level in this economy is 150, will quantity demanded equal, exceed, or fall short of the quantity supplied? By what amount? If the price level is 250, will the quantity demanded equal, exceed, or fall short of the quantity supplied? By what amount?

c. Suppose that buyers desire to purchase \)200 billion of extra real output at each price level. Sketch in the new aggregate demand curve as AD1. What are the new equilibrium price level and level of real output?

Suppose that consumer spending initially rises by \(5 billion for every 1 percent rise in household wealth and that investment spending initially rises by \)20 billion for every 1 percentage point fall in the real interest rate. Also, assume that the economy’s multiplier is 4. If household wealth falls by 5 percent because of declining house values, and the real interest rate falls by 2 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? In what direction and by how much will it eventually shift?

What assumptions cause the immediate-short-run aggregate supply curve to be horizontal? Why is the long-run aggregate supply curve vertical? Explain the shape of the short-run aggregate supply curve. Why is the short-run curve relatively flat to the left of the full-employment output and relatively steep to the right?
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