3.1 Aggregate Demand

What is aggregate demand (AD)?

• The willingness and ability to purchase a product at a given price.

   

• The total spending on services in a period of time at a given price level.

• The total spending on goods and services in a period of time at a given price level.

• The total demand for a product in an industry.

Which of the following is not a component of aggregate demand?

• Investments

• Savings

• Consumption

• Government spending

When inflation is high the _______________of the dollar decreases

• cost value
• purchasing power
• importance
• validity

What is inflation?

• rise in all prices
• rise in most prices
• rise in some prices
• rise in general prices

What the definition of deflation?

• decrease in the average price of goods and services

• occurs when the price of goods and services rise

• the amount one dollar can buy is reduced

Americans revive their love of SUV’s and the newly remodeled, but still “gas guzzling” Hummer. What happens to the market for gasoline?

• Demand for gasoline will decrease

• Demand for gasoline will increase

• Demand for gasoline will stay the same

Changes in price level

• Shift the AD curve left (decrease)

• Shift the AD curve right (increase)

• Move along the AD curve

• Shift the AS curve right (increase)

• Shift the AS curve left (decrease)

Contractionary fiscal policy includes

• Decreasing government spending

• Tax increases

• Tax decreases

• Increasing government spending

Expansionary fiscal policy includes

• Decreasing government spending

• Tax increases

• Tax decreases

• Increasing government spending

Wealth Effect

• “Sticky Wages” prevents wages from falling. The government should deficit spend to close the gap.

• Price levels effect purchasing power which effects spending

• When U.S. price levels rise, then GDP decreases due to an increase in imports and a decrease in exports.

• Price levels and economy will fix itself. No Government involvement required

• When price levels increase, lenders need to charge higher interest rates which decreases consumer and business investment spending.