Aggregate Demand- Macro Topic 3.1

What is the most important graph in a macroeconomics class?

• Aggregate demand

• Foreign exchange

• Loanable funds

• Phillips curve

Answer explanation

The most important graph in a macroeconomics class is the Aggregate demand graph, as it shows the total demand for goods and services in an economy at a given price level.

What is the reason for the downward sloping aggregate demand curve known as the real wealth effect?

• When prices increase, other countries want to buy higher priced goods

• When price level goes up, people buy less and save less

• When price level goes up, people buy less and save more

• When price level falls, assets of consumers have more purchasing power

Answer explanation

The real wealth effect occurs when the price level falls, increasing the purchasing power of consumers' assets.

What is the effect of a boom in the stock market on aggregate demand?

• Increase

• Unpredictable

• Decrease

• No effect

Answer explanation

A boom in the stock market increases wealth and confidence, leading to higher consumer spending and investment, thus increasing aggregate demand.

What happens to aggregate demand if the US dollar appreciates?

• Fluctuate

• Decrease

• Remain unchanged

• Increase

Answer explanation

When the US dollar appreciates, it becomes more expensive for foreign buyers to purchase US goods and services, leading to a decrease in aggregate demand.

What is the effect of a significant increase in income taxes on aggregate demand?

• Opposite effect

• Increase

• Decrease

• No effect

Answer explanation

A significant increase in income taxes would decrease disposable income, leading to a decrease in consumer spending and overall aggregate demand.

What is the reason for the downward sloping aggregate demand curve known as the interest rate effect?

• When price level goes up, people buy less but save less

• When price level falls, assets of consumers have more purchasing power

• When price level falls, people buy less but save more

• When price level goes up, people buy less and save more

Answer explanation

The correct answer is when the price level goes up, people buy less and save more, leading to a downward sloping aggregate demand curve known as the interest rate effect.

What is the effect of a widespread fear of a recession on aggregate demand?

• Opposite effect

• No effect

• Increase

• Decrease

Answer explanation

A widespread fear of a recession would decrease aggregate demand as consumers and businesses reduce spending and investment, leading to a decrease in overall economic activity.

What is the effect of a decrease in the real interest rate on aggregate demand?

• Increase

• Decrease

• Fluctuate

• Remain unchanged

Answer explanation

A decrease in the real interest rate will increase aggregate demand because it makes borrowing cheaper, leading to increased spending and investment.

What is the effect of a significant increase in transfer payments on aggregate demand?

• Opposite effect

• No effect

• Decrease

• Increase

Answer explanation

A significant increase in transfer payments will lead to an increase in aggregate demand as it puts more money in the hands of consumers, leading to higher spending and overall economic activity.

What is the reason for the downward sloping aggregate demand curve known as the exchange rate effect?

• When prices increase, other countries want to buy higher priced goods

• When price level falls, assets of consumers have more purchasing power

• When price level falls, people buy less but save more

• When price level goes up, people buy less and save less

Answer explanation

The correct answer is: When prices increase, other countries want to buy higher priced goods, leading to a downward sloping aggregate demand curve known as the exchange rate effect.