1. In the AD/AS model, the aggregate demand for goods and services is composed o
ID: 1122257 • Letter: 1
Question
1. In the AD/AS model, the aggregate demand for goods and services is composed of the purchases of a. Households and foreigners (net exports) b. Businesses, bondholders, and foreigners (net exports) c. Businesses and governments d. Consumers, investors, governments, and foreigners (net exports) If the price level declines, the fixed amount of money in your bank account will be able to buy more real goods and services. This phenomenon is known as the a. Price level effect b. wealth effect c. interest rate effect d. income effect As prices rise, consumers and businesses will want to hold larger money balances. The direct effect of this will be a(n) a. Reduction in the demand for resources and increased resource prices b. Increase in the amount of goods and services demanded due to the wealth effect c. Increase in exports due to the international substitution effect d. Reduction in the supply of loanable funds and an increase in the interest rate Which of the following helps explain the downward slope of the aggregate demand curve? 2. 3. 4. The wealth effect a. b. The multiplier effect Expansionary fiscal policy d. c. This is a trick question. The aggregate demand curve is upward sloping The short-run aggregate supply curve indicates the direct relationship between a. 5. Prices and quantity of goods and services purchased in the economy b. Prices and the quantity of goods and services that domestic firms will supply Prices and the profits of domestic firms c. d. Profit of domestic firms and the quantity of goods and services that domestic firms will supply In the macro model of aggregate supply and aggregate demand the vertical axis measures 6. while the horizontal axis measures a) Price, quantity of a good b) The price level, quantity of a good c) Price, real GDP The price level, real GDP d) The long-run aggregate supply curve indicates that in the long run, an increase in prices will lead to a. No change in output produced b. An increase in output produced c. A reduction in output produced d. An uncertain change in output The short-run aggregate supply curve (SRAS) slopes upward to the right because unexpected increases in prices will a. Increase aggregate demand as consumers buy more b. Decrease aggregate demand as consumers buy less c. Cause firms to expand output since the higher product prices will improve profitability d. Cause firms to reduce output since the higher product prices will squeeze profit margin 7. 8.Explanation / Answer
1. Four components of aggregate demand are consumption(C), investment(I), Government expenditure(G) and net export(NX). AD is sum of these 4 components. Hence, option D is the answer.
2. The phenomenon is known as the wealth effect. Wealth effect states that real value of money depends on the price level. This is because, for a given or fixed amount of money, a lower price level provides more purchasing power per unit of currency. So, when price level Declines you can buy more real goods and services with your fixed bank amount.
Answer- option B
3. When consumers and businesses want to hold larger money balances due to increase in price level(inflation), the central bank will slow down the money supply to stabilize the Economy. This will restrict the supply of loanable funds as savings decreases. Reduction in supply of loanable funds will cause an increase in interest rate.
Answer- option D
4. Downward slope of aggregate demand can be explained by pigou's wealth effect or simply, wealth effect. Real value of money always depends on the price level and for a given amount of money, lower price level provides more purchasing power per unit of currency. So, a drop in price level will make consumers more wealthier and will induce them to spend more, Therefore AD will increase.
Answer- option A
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