Use the following to answer question 9: (Figure: Shift of the Aggregate Demand C

Question

Use the following to answer question 9: (Figure: Shift of the Aggregate Demand Curve) A movement from point B on AD_1 to point E on AD_2 could have been the result of: an increase in consumer optimism. an increase in consumer pessimism. an increase in personal income taxes. the central bank reducing the quantity of money. The AD curve represents a negative relationship between price levels and real GDP in the economy. This can be justified because the following hold; As inflation occurs, my purchasing power falls As inflation occurs, consumers rush to banks for credit and thus raises interest rates and thus reduces quantity demand of real GDP in the economy As price levels in the U.S. rise, we buy cheaper imported goods and thus reduce quantity demand of real GDP m the economy All of the above The international trade effect helps justify the downward slope of the AD curve but the exchange rate effect will shift the AD curse at a given price level True False

Explanation / Answer

Answer 9) A movement from point from point B on AD1 to point E on AD 2 can be

a)increase in consumer optimisim- it makes the consumer positive ,thus he buys more leading to more AD

Answer 10)AD curve represents negative relationships between price level & gdp in the economy. Justified by

E) only a&b.

Answer 11) The international trade effect help justify the downward sloping AD but exchange rate affect will shift AD curve- FALSE

A rise in domestic prices makes exports less competitive and imports more competitive; hence exports (X) are likely to fall and imports (M) are likely to rise. Both of these reactions combine to create a trade effect, with lower aggregate demand at the higher price level.

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