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Chapter 12: Q4. (page 259)

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

Short Answer

Expert verified

The multiplier effect gets weak because aggregate demand changes affect prices and output due to an upward-sloping aggregate supply curve.

Step by step solution

01

Explanation

The upward-sloping aggregate supply curve weakens the multiplier effect as the aggregate demand curve changes the price and output level. For example, there is an increase of $105 million in aggregate demand due to a rise in investment spending; there is an increase of $100 million in real output and $5 million in prices as the inflation rate averages 5%. The multiplier cannot show its full effect and becomes weak as some part of aggregate demand is captured by the higher prices; thus, the real output cannot change to the full extent with the change in aggregate demand.

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Most popular questions from this chapter

Why is the aggregate demand curve downsloping? Specify how your explanation differs from the explanation for the downsloping demand curve for a single product. What role does the multiplier play in shifts of the aggregate demand curve?

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? In each case, use a diagram to show the expected effects on the equilibrium price level and the level of real output, assuming that the price level is flexible both upward and downward.

  1. A widespread fear by consumers of an impending economic depression.

  2. A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output.

  3. A reduction in interest rates.

  4. A major increase in spending for health care by the federal government.

  5. The general expectation of coming rapid inflation.

  6. The complete disintegration of OPEC, causing oil prices to fall by one-half.

  7. A 10 percent across-the-board reduction in personal income tax rates.

  8. A sizable increase in labor productivity (with no change in nominal wages).

  9. A 12 percent increase in nominal wages (with no change in productivity).

  10. An increase in exports that exceeds an increase in imports (not due to tariffs).

Distinguish between "real-balances effect" and "wealth effect," as the terms are used in this chapter. How does each relate to the aggregate demand curve?

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.

True or False. If the price of oil suddenly increases by a large amount, AS will shift left, but the price level will not rise thanks to price inflexibility.
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