ECN 204 Chapter 10: ECN 204 Chapter 10 Notes.docx

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goldswan943

13 Mar 2012

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Document Summary

Is a schedule or curve that shows the amounts of real output (real gdo) that buyers collectively desire to purchase at each possible price level. A change in the price level produces a real-balances effect. Is the inverse relationship between the price level and the real value (or purchasing power) of financial assets with fixed money value. So a higher price level means less consumption spending. The direct relationship between price level and the demand for money, which affects interest rates, and, as a result, total spending in the economy. Similarly, consumers may decide not to purchase a new house or automobile when the interest rate on loans goes up. So, by increasing the demand for money and consequently the interest rate, a higher price level reduces the amount of real output demanded: foreign-trade effect: The inverse relationship between the net exports of an economy and its price level relative to price levels in the economies of trading partners.

Related Questions

Aggregate demand curves slope downwards for each of the following reasons except:

(i) The substitution effect: As the price level falls, people buy more of the cheaper goods and less of other goods.

(ii) The wealth effect: As the price level falls, the buying power of people's savings increases and induces them to spend more.

(iii) The interest rate effect: As prices for outputs rise, it costs more to make the same purchases, driving up the demand for money, raising interest rates and reducing investment spending.

(iv) The foreign price effect: As the price level falls, the USA becomes more attractive to foreigners and domestic residents, increasing net export spending.

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In response to a negative supply shock, the government decreases taxes. The most likely result of the government's tax decrease is:

	a decrease in unemployment and a decrease in the aggregate price level.
	a decrease in unemployment and an increase in the aggregate price level.
	an increase in unemployment and an increase in the aggregate price level.
	an increase in unemployment and a decrease in the aggregate price level.

If the aggregate price level rises, holding everything constant, consumers will:

	demand less aggregate output at all price levels resulting in a shift right of the AD curve.
	find their purchasing power has increased and will purchase more goods and services leading to an increase in the aggregate output demanded.
	need more money to purchase the same basket of goods which will lead to an increase in the demand for money leading to interest rate increases, and a reduction in the quantity of aggregate output demanded via a drop in investment demand.
	need less money to purchase the same basket of goods which will lead to a decrease in the demand for money leading to interest rate decreases, and an increase in the quantity of aggregate output demanded via an increase in investment demand.